Centrica PLC’s Fall Makes It A Better Buy Than SSE PLC and National Grid plc Now

The Centrica PLC (LON: CNA) price fall has made its shares look attractive: how about peers National Grid plc (LON:NG) and SSE PLC (LON:SSE)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

When Centrica (LSE: CNA)(NASDAQOTH: CPYYY.US) slashed its 2014 full-year dividend by 21%, investors were shocked. After all, utilities companies are the safest on the planet and should never reduce their annual cash payouts, isn’t that so?

Well, the thing is, these firms pay out a very large portion of their earnings as dividends — Centrica’s 2013 dividend was covered 1.6 times by earnings, and that’s high for the sector. There’s very little safety margin there, and when a dividend cut is necessary it can lead to an emotional over-reaction. We saw the same with insurance companies, where dividend cuts that were badly needed to restore the long-term health of the sector led to short-term crashes with people selling out at exactly the wrong time.

More cash needed

Centrica had decided that its cash situation needed to be beefed up a bit, and in the face of falling profits the only thing it could do was reduce the amount of the stuff it hands back to shareholders.

Full year results from SSE (LSE: SSE) won’t be with us until 20 May, with figures from National Grid (LSE: NG) due a day later — their year-ends are three months later than Centrica’s at the end of March. SSE’s current dividend forecast suggests a yield of 5.8% with the shares priced at 1,572p, and that would be covered only around 1.3 times by predicted earnings — quite a bit less than Centrica’s 2013 dividend cover.

SSE has faced squeezed revenue as well, partly from regulatory pressure, and it’s also in a bit of a tight cash situation with net debt having risen at the halfway stage in September to £6.1bn, from £5.9bn at its previous year end. And there was only £244m in cash and equivalents on the books.

Divi cut?

Could SSE reduce its final dividend? I think it could, and it would now avoid the stigma of being the first to do so — and that would almost certainly trigger a share price fall.

Over at NG there’s a 15% fall in EPS forecast, and while that’s not as big as the drop Centrica has just reported, it will surely put pressure on the firm’s dividend — expected to yield 4.8% on a price of 246p. And it’s only set to be covered around 1.3 times again, just like SSE’s.

NG’s first-half net debt was up too, by £554m to £21.7bn — and though that’s not a big percentage rise, coupled with falling EPS it could lead the company to retain more cash this year. Against that, NG has restated its intention to keep dividends growing in line with inflation, and that makes me feel we’re less likely to see a dividend cut.

Oversold?

But with Centrica’s shares down 13% since the dividend cut was announced to 245p, and down 17.5% since their recent high earlier this month, I think they’re oversold now. We’re looking at a forecast P/E of well under 13 for the current year, and even after the cut the dividend is still likely to yield over 5% — and recent brokers’ updates have set significantly higher price targets for the shares, of between 270p and 325p. I rate Centrica a Buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

2 cheap passive income shares to consider buying right now

The passive income we can earn from the UK stock market looks set to climb this year, and could even…

Read more »

Investing Articles

Down 15% in a month, this FTSE 100 dividend share offers investors a stunning 10.8% yield

Harvey Jones plucks out a FTSE 100 dividend share that offers frankly a quite staggering yield and is now a…

Read more »

Investing Articles

3 reasons I just bought Nvidia for my Stocks and Shares ISA

Nvidia stock fell victim to the epic market sell-off earlier in April as the Trump administration's policy on tariffs caused…

Read more »

Electric cars charging in station
Investing Articles

Looking at Tesla stock? Consider this Warren Buffett-held EV rival instead

Tesla stock is one of the most popular investments in the UK right now. However, Edward Sheldon sees more appeal…

Read more »

Investing Articles

Up 18% in the past week, I think this FTSE 100 share could keep soaring!

While the FTSE 100's up 5.6% in the past week, this blue-chip share's risen much more sharply. Can it move…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

2 top growth stocks to consider buying for the next phase of the AI revolution

The artificial intelligence (AI) revolution is advancing rapidly on the application side, setting up these two growth stocks for more…

Read more »

Growth Shares

Will the Lloyds share price be a winner or loser from the tariffs turmoil?

Jon Smith explains both sides of the argument when trying to figure out if the Lloyds share price will move…

Read more »

Investing For Beginners

Aston Martin: is there a real risk the FTSE company goes bust?

Jon Smith notes the struggles over the past few years of an iconic car brand, but explains why his head…

Read more »