Earnings: time to buy Centrica shares after bumper profits?

After a few years of falling profits, Centrica shares have been on an upwards run. That’s now been cemented by full-year results.

| 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.

White female supervisor working at an oil rig

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.

Having difficulties with soaring energy costs? Many of us might be suffering, but things are going well for Centrica (LSE: CNA). The owner of British Gas just posted soaring profits for 2022. Centrica shares rose only 5% in morning trading in response.

The price has gained 33% over the past 12 months, mind, climbing since November as the energy cost crisis started to bite.

Created with Highcharts 11.4.3Centrica Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

I note the company opened its results statement by telling us how it’s been helping its customers, and that it paid around £1bn in tax on its profits. If I were the cynical type, I might suspect that was an attempt to soften any possible criticism.

Results

But shareholders mostly want to know about profits, and they didn’t disappoint. Total adjusted EBITDA came in at £4bn. The company posted just £1.9bn for the previous year.

Adjusted basic earnings per share soared from 4.1p in 2021 to 34.9p. And, erm, the company’s adjusted effective tax rate was actually lower than in 2021. The group ended the year with adjusted net cash of £1.2bn on the balance sheet, up from £680m.

Despite that large EPS figure, Centrica is to pay a full-year dividend of just 3p per share. On the current share price, that’s a modest 2.9% yield. Still, cover by earnings is very strong. And it wouldn’t be wise to set long-term expectations based on one exceptional year.

Profit-taking?

Why has the share price reaction been relatively muted? I wouldn’t be surprised if investors who bought last year have taken some profits, helping to hold it back a bit. “Buy on the rumour, sell on the news,” goes an old investing adage. And I doubt many will expect these profit levels to repeat next year.

What does it all mean for investors now? For me, it’s all about two things. The first is valuation. On the latest share price, that EPS of 34.9p per share represents a price-to-earnings (P/E) ratio of only three.

That’s on one-off 2022 earnings, though. And we really can’t take it to indicate a reliable long-term valuation. On 2021 adjusted EPS, for example, the same share price would put the P/E at 25. And that’s not obviously cheap at all. But then, that was after several years of falling profits, and it also can’t be assumed to say anything about the future.

Outlook

This latest results update contained plenty of words about Centrica’s 2023 outlook. But there weren’t any overall numbers. All I can take from it is that next year is unlikely to be as profitable.

Forecasts put the P/E at around eight in two years time, with a dividend yield of 4%. It’s a bit risky to look that far ahead, but it does make Centrica shares look cheap.

The other factor for me is that I only invest for the long term. And the signs suggest gas might not have a long-term future. For that reason, I won’t buy. But I wouldn’t be surprised to see Centrica investors having a profitable few years ahead of them.

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

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »

Investing Articles

Are Trump’s tariffs a once-in-a-lifetime chance for ISA investors to get rich?

The £20,000 Stocks and Shares ISA limit will reset on 6 April. Smart investors could use current market volatility to…

Read more »

Investing Articles

Here are the latest Persimmon share price and dividend forecasts

Our writer looks at the latest forecasts for the Persimmon share price and considers what level of dividend the stock…

Read more »