Down 20% in 5 years, are Centrica shares a no-brainer buy now?

Centrica shares have been climbing steadily since 2020, but they’re still on a low fundamental valuation. And the cash is flowing again.

| 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.

Centrica (LSE: CNA) has been in the news recently, for the wrong reasons. Well, its British Gas unit has hit the headlines after being ordered to stop forcing entry to install pre-payment meters for struggling customers. But high gas prices have been good for investors, as the Centrica share price is up 25% in the past 12 months.

The big question, though, is whether we’re seeing a short-term bubble inflated by high energy prices. If so, it could burst when inflation comes under control. And fears for the future of fossil fuels might well help drive long-term share price weakness.

But I see a few reasons to buy Centrica now. One comes from viewing the share price in its longer-term context.

Prior to the pandemic, Centrica shares had been steadily falling. Over the past five years, shareholders have seen their investment lose 22% of its value. Earnings have dropped. And the 2019 dividend was slashed in the wake of the pandemic, before being suspended completely in 2020. But forecasts are improving, and the shares might well be undervalued now.

Valuation

Based on 2023 forecasts, the stock is on a prospective price-to-earnings (P/E) ratio of only four. For a company with an essential product and defensive characteristics, that could be no-brainer-cheap.

It looks like dividends could be on their way back too. Centrica does seem to have cash to return to shareholders as it’s currently buying back its own shares.

The company should post 2022 results on 16 February, and its January update was optimistic. The board expects adjusted earnings per share of above 30p. That would mean a P/E of 3.2, in line with forecasts. And with cash generation apparently good, there should be net cash of more than £1bn on the balance sheet.

Dividends

There’s no indication of full-year cash returns yet. But forecasts suggest a 3% dividend yield and rising. That’s based on payments still considerably below pre-pandemic levels, mind.

But all this comes in a year of soaring energy prices. BP and Shell have just recorded record profits for 2022, as the whole oil and gas sector benefits.

In the medium term I think prices will settle, inflation will come down, and 2022’s bumper profits might not be repeated. And looking further ahead, renewable energy is the inevitable future.

Is it a buy?

Would I buy Centrica shares today? Considering prospects for the next few years, I think they look very cheap. And if I could see a long-term future for the gas business, I’d be snapping them up at today’s valuation. Perhaps not quite a total no-brainer, but a super low P/E coupled with improving dividend prospects would make Centrica a buy for me for sure.

But I really don’t see the long-term prospects I’d need. In another 10 years, gas could be following coal as an undesirable way to heat our homes. And if I wouldn’t hold a share for 10 years, I won’t buy it. I do think I could be missing some short-term gains, though.

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 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 »