2014 has been a thoroughly disappointing year for investors in Centrica (LSE: CNA). Shares in the domestic energy supplier and exploration company have fallen by 14%, thereby significantly underperforming the FTSE 100’s decline of 1.5% since the turn of the year.
Indeed, with a change in senior management looming, profit disappointing and the political risk that comes with being a domestic energy supplier, sentiment in Centrica has declined throughout the year. However, looking ahead to 2015, Centrica could beat the FTSE 100 and deliver strong returns to its shareholders. Here’s why.
Earnings Growth
As mentioned, Centrica’s disappointing business performance in 2014 has been a key reason why investor sentiment has declined. Indeed, earnings are due to fall by 22% year-on-year for 2014, which is clearly a significant fall in the bottom line – especially for a company that is two-thirds utility (and one third exploration) and, as such, that would be expected to post less volatile numbers.
However, next year is expected to be much better. That’s because Centrica is forecast to bounce back and deliver bottom-line growth of 13%. If met, that rate of growth is likely to be around twice that of the wider index, and a key consequence of such strong performance could be improved sentiment (and a higher share price).
Income Potential
Clearly, Centrica holds major appeal as an income stock. That’s because, having fallen heavily in recent months, shares in the company now yield a hugely impressive 5.9%. That puts it close to the very top of the FTSE 100 high-yielders and, in addition, Centrica’s dividend payments remain reasonably well-covered at 1.2 times. Furthermore, with earnings set to grow next year, dividends per share are due to rise by 2.9%, which is almost 2.5 times the current inflation rate. This means that Centrica could be yielding as much as 6.1% in 2015, assuming its share price does not change.
However, a yield of 6.1% is unlikely to be allowed to remain so high – especially when interest rates are expected to remain at historic lows for much of the next year. As a result, high-yield shares, such as Centrica, could find their share prices being bid up by income investors, which would clearly be great news for existing shareholders.
Looking Ahead
While the General Election of 2015 poses a significant risk to Centrica and its domestic energy peers due to the possibility of an energy price freeze in its aftermath, this risk seems to have been adequately priced in. For example, Centrica’s price to earnings (P/E) ratio is just 12.7 and its yield of 5.9% also indicates that shares are very attractively priced at their current levels. As such, an ample margin of safety appears to be already built in to Centrica’s share price.
So, while 2014 has undoubtedly been a disappointing year for Centrica, 2015 could prove to be much better. In fact, Centrica could turn the tables and beat the FTSE 100 in 2015.
