The Centrica (LSE: CNA) share price is down 70% over the past five years, and we’re still seeing no sign of an upturn for the British Gas owner.
Instead, 2019 results released on 13 February sent the share price plunging again. My colleague Paul Summers described the results as horrific, and I certainly can’t disagree. Perhaps the biggest blow was the slashing of the dividend by more than half, to 5p per share.
But even after that, a glance at the fundamentals makes the shares still look undervalued, at least superficially. Forecasts put them on a price-to-earnings of only nine. And even after the big cut, the 5p dividend would still provide a yield of 6.6%.
So what’s keeping the Centrica share price down?
Regulation
In the results announcement, chief executive Iain Conn said: “2019 operating profit and earnings were materially impacted by a challenging environment, most significantly the implementation of the UK default tariff cap and falling natural gas prices.”
The energy price cap is far from being the biggest contributor. But signs of increasing regulatory actions by government will almost always spook investors and chase them away. It’s something we always face with companies in regulated industries. Still, we should at least expect fair regulation based on genuine economic needs, shouldn’t we?
My colleague Karl Loomes suggests we’re looking at something different, and I agree. The energy firms featured big in the election campaign, especially for Labour. And Boris Johnson has not hesitated to turn to popularism to boost his attraction for working class voters.
I don’t see that as likely to change, not when the opposing argument would be something like: “So, would you rather Jeremy Corbyn won and took your company away from you?“
Commodity prices
The biggest hit looks to have come from the “falling natural gas prices” spoken of by the CEO. Low commodity prices in general are hitting the energy sector, along with a number of other industries.
The company reported better performance in the second half of 2019, and Conn reckons the momentum should carry forward into 2020. But he did also caution that “upstream earnings are likely to be impacted by the lower commodity price environment.”
Oil prices don’t look to me like they’re likely to get much above $60 for the rest of 2020. Not with poor worldwide economic performance acting as a brake on commodity demand. I see no letup on that score any time soon.
Pessimistic outlook
We did have an analysts’ consensus for a 15% rise in earnings per share for Centrica in 2020, but that’s been declining over the past 12 months. A year ago, the consensus for 2020 stood at 13.4p per share. Now it’s at 8.4p. And, after seeing the 2019 figures, I fear forecasts will be downgraded further.
In addition to this weakening outlook, a large majority of brokers are neutral on Centrica shares. Remember, these are shares trading on a very low P/E with dividend yields that are still high. That, to me, says they’re expecting the outlook to darken further too.
With these three big issues weighing on its business, I think Centrica’s share price will remain weak for some time to come.
