The Centrica dividend could soon soar. Should I buy?

Christopher Ruane thinks a big cash pile could end up funding a bumper Centrica dividend. But that isn’t enough for him to buy the shares.

| 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.

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant

Image source: Getty Images

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.

There has been good news from energy company Centrica (LSE: CNA) that I think could bode well for future shareholder payouts. Indeed, I reckon the Centrica dividend could surge. So should I buy?

Strong business tailwinds

In an announcement to the stock market yesterday, the firm said it has continued to deliver strong performance. Specifically, the business expects to report full-year adjusted earnings per share of more than 30p. For a share that currently trades for around 97p, that seems really high to me.

On top of that, the company said cash generation has been good. It expects closing net cash for the last year to be above £1 billion. Given that the current market capitalisation is £5.7bn, the net cash equals more than one sixth of the firm’s market-cap.

Impact on the dividend

Historically, Centrica was a strong dividend payer. Indeed, this was one of the reasons many investors bought the shares, including me at one stage. But the company had already slashed its dividend before the pandemic and then stopped it altogether.

Although it finally brought it back last year, it was at a lower level than before the pandemic. That parsimony was one reason I sold my Centrica shares. The company has sold assets in recent years. That helped eradicate its debt, but it also means future earnings streams could be weaker than they were in the glory days of the Centrica dividend.

The latest news that the company has a huge cash pile could mean some funds are returned to shareholders. That could be through a special dividend, a boost in the ordinary Centrica dividend, or a share buyback. For now though, the company has not indicated what it plans to do with its surplus cash.

Long-term outlook

On paper, I think the latest news makes Centrica look undervalued. The company is debt-free, generates substantial cash and trades on a low price-to-earnings ratio. I see it as no coincidence that the British gas owner’s share price reached a 12-month high in trading today.

If energy prices remain buoyant, that could be good for both revenues and profits at the firm. Not only do I think there could be a bumper Centrica dividend at some point, I also see further potential for upwards share price movement.

I’m not buying

But here’s the thing. Centrica has disappointed so often in the past, I lack confidence in the long-term attractiveness of its business. The shares are 30% lower today than they were five years ago. The annual dividend per share is a mere fraction of what it was back then.

The business is heavily exposed to gas, which I think will continue to suffer from declining customer demand. Also, while booming energy prices have helped the firm lately, a crash in gas prices could eat into its profitability badly.

Yes, the company has a big cash pile. Yes, it might pay that out as a dividend, although there is no guarantee that will happen. But despite its currently attractive balance sheet, I do not see this as a great business with excellent long-term commercial prospects.

I will therefore not be buying the shares again in the foreseeable future.

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.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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

Person holding magnifying glass over important document, reading the small print
Investing Articles

Just released: our top 3 small-cap stocks to consider buying in October [PREMIUM PICKS]

Small-cap shares tend to be more volatile than larger companies, so we suggest investors should look to build up a…

Read more »

Investing Articles

How I’d use an empty Stocks and Shares ISA to aim for a £1,000 monthly passive income

Here's how using a Stocks and Shares ISA really could help those of us who plan to invest for an…

Read more »

Investing Articles

This FTSE stock is up 20% and set for its best day ever! Time to buy?

This Fool takes a look at the half-year results from Burberry (LON:BRBY) to see if the struggling FTSE stock might…

Read more »

Investing Articles

This latest FTSE 100 dip could be an unmissable opportunity to pick up cut-price stocks

The FTSE 100 has pulled back with the government’s policy choices creating some negative sentiment. But this gives us a…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

As the WH Smith share price falls 4% on annual results, is it still worth considering?

WH Smith took a hit after this morning’s results left shareholders unimpressed. With the share price down 4%, Mark Hartley…

Read more »

Investing Articles

The Aviva share price just jumped 4.5% but still yields 7.02%! Time to buy?

A positive set of results has put fresh life into the Aviva share price. Harvey Jones says it offers bags…

Read more »

Investing Articles

Can a €500m buyback kickstart the Vodafone share price?

The Vodafone share price has been a loser for investors in recent years, and the dividend has been cut. We…

Read more »

Frustrated young white male looking disconsolate while sat on his sofa holding a beer
Growth Shares

3 mistakes I now avoid when choosing which growth stocks to buy

Jon Smith runs through some of the lessons he's learnt the hard way over the years about what to look…

Read more »