I’m tempted by the low Centrica share price despite a looming dividend cut

Harvey Jones says the price may finally look right for energy giant Centrica plc (LON: CNA), but it’s still risky.

| 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 is a defensive sector no longer defensive? When it’s the utility sector. FTSE 100 giants such as British Gas-owner Centrica (LSE: CNA) and pipes and wires giant National Grid both slumped over the past five years. FTSE 250 water utility and waste management company Pennon Group (LSE: PNN) has found itself in the same leaky boat.

However, utilities still offer investors one compelling benefit – electric yields. Is that reason enough to invest?

Working on water

Pennon’s share price dipped slightly after it posted a 1% drop in statutory profit before tax to £260.1m in this morning’s full-year results. However, taking a more positive view, that worked out as an 8.3% rise on an underlying basis to £280.2m after non-underlying items of £19.9m, broadly comparable with last year.

The group also posted a 6.1% rise in underlying revenues to £1.48bn, and a 8.4% gain in underlying operating profit to £350m. Management hailed a “robust performance in 2018/19”, in line with expectations, including £17m of efficiencies. The dividend per share increased 6.4% to 41.06p and the stock now offers a forward yield of 6%, with cover of 1.3.

Waste not, want not

Pennon has to keep investing in the business, pumping in £650m in the current regulatory period, and more than £7bn in total since 1989. Its stock has fallen 22% in the past two years, but that leaves it trading at 12.8 times earnings, a tempting entry point for long-term income seekers.

The group operates both South West Water and Viridor Recycling, and the latter has benefited from the ‘Blue Planet effect’, boosting recycling rates. As Roland Head points out, water gives stable cash flows while recycling offers greater growth prospects, as seen in Viridor’s EBITDA growth of +19.1%. It could nicely underpin your portfolio, unless you fear a Corbyn-style asset snatch.

Low energy

That shadow hangs over Centrica too, but that isn’t the only reason for its dismal share price showing, or even the main one. Centrica stock trades a whopping 75% lower than five years ago as a customer exodus, mild winters, nuclear outages, volatile energy prices, softening upstream revenues, and the energy cap combine to menace profits.

One thing undoubtedly tempts – a forward yield of 11.2%. However, this isn’t to be relied on as almost everyone expects it to be cut soon. There’s a precedent… Centrica cut by 30% in 2015.

That said, a cut wouldn’t be the end of the world given today’s outsize income stream. Even a 50% drop would still give a juicy yield of around 5.5%. If you’re serious about buying Centrica you might be tempted to wait until after the cut, although I suspect it’s already in the share price.

Price looks right

Earnings per share have fallen for five successive years and a further 12% drop is expected in the year to 31 March 2019. However, City analysts reckon earnings could rebound 19% the year after, even though revenue growth looks flat.

GA Chester reckons Centrica has fallen so far it finally looks cheap enough to buy, valued at just 9.9 times forecast earnings for 2020. Now could be a good time to take a position, nationalisation threats notwithstanding.

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.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »