I sold my small stake in energy company and British Gas owner Centrica (LSE: CNA) last year. But did I make a mistake? Could I have earned more money holding onto Centrica shares?
Over the past year, after all, they have performed strongly.
Surging share price
In those 12 months, Centrica shares have moved up in value by 44%. Not only that, but in November, a 1p per share dividend was paid. A final dividend of 2p per share has been declared, but is not due to be paid until July.
So over the past year, owning Centrica shares would have earned me 1p per share in dividends. Based on the share price a year ago, that would bring my total one-year return on such an investment to 46%.
That is impressive. Buying Centrica shares a year ago, when they had already been moving up fairly steadily, I would have already increased the value of my investment by almost half.
Should I buy now?
However, I did not buy a year ago. Indeed, I made a choice to get out of Centrica last year.
Since then, the company has benefitted from a number of tailwinds. Some were foreseeable, such as an improved balance sheet following the streamlining of the company through asset sales. Others were harder to predict at the start of last year, such as the impact of the war in Ukraine on energy prices, although 12 months ago investors were already factoring that in.
If such factors persist, there could be further gains ahead for Centrica shares. After all, on some metrics, they still look dirt cheap. They trade for less than three times last year’s free cash flow, for example.
So should I buy? I am still wary of the company, because of the risks involved. Clearly, dramatic shifts in energy prices can have a big impact on the firm’s profitability. That could mean smaller earnings in future as energy prices fall.
The company has a long history of poorly-handled public relations, most recently around a massive pay rise for its boss. The dividend has been brought back, but is just a quarter of what it was in 2018. Both factors could hurt investor sentiment.
On top of that, the company’s core business of gas distribution and sales is in long-term decline. British Gas saw its number of residential and business customers rise last year. But that party reflects the impact of some rivals folding.
Over the past decade British Gas has seen its residential customer base fall by 52%. In the long term, I expect environmentalist pressure will mean demand for gas in the British Isles continues to fall. That could be bad for revenues and profits at Centrica.
I’m staying out
So not owning Centrica shares over the past year has meant I missed the opportunities for sizeable gain. But I decided not to own them because I did not like the risk profile and long-term business prospects of the firm.
That remains the case — so I shall not be buying.
