Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend — as well as some risks.

| 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.

Over the past few years, shares In energy company Centrica (LSE: CNA) have moved around a lot. In just under four years, the price has quadrupled. The Centrica dividend has been growing, rising by a third last year.

The current dividend yield is around 3%. If I had bought the shares for pennies back in 2020 though, my investment would now be yielding over 9%.

Such is the power of a low share price. Not only can it increase, it can also mean a better future yield than buying the same shares at a higher price.

Dividend movement

The Centrica dividend has been inconsistent though. We saw good growth last year, but after a period where there was no shareholder payout.

Even after last year’s strong growth, the current annual Centrica dividend of 4p per share is nowhere near what it used to be. It is not at even a quarter of what it was just over a decade ago.

Dramatically different business

Why would dividends move around so much? Some companies produce stable or generally growing income and cash flows. That helps them fund dividend growth. Shares like Diageo and Spirax-Sarco have raised their annual dividends for decades.

Not all businesses have such characteristics. So while global oil and gas giant Exxon has raised its annual dividend for decades, many energy businesses have cyclical earnings. High energy prices can lead to booming profits, while a weak market can see earnings plummet.

Centrica has not only had to contend with energy market price cycles. It is heavily exposed to a part of the energy market that has seen long-term structural demand falls, namely gas.

Government statisticians estimate that between 2005 and 2022, UK gas consumption fell 32.9% in total. It had been falling before that period and remains in decline.

But some large business sales over the past few years mean that Centrica is a different business to what it used to be.

All of that has led the company’s earnings per share to move around significantly.

Strong balance sheet

That matters because earnings and cash flows are central to what happens to the Centrica dividend.

The asset sales, combined with high energy prices, have been a boon for the British Gas owner’s balance sheet. It ended last year with net cash of £2.8bn, compared to £1.2bn at the same point the prior year.

But although Centrica boosted its dividend, it also spent £1bn last year buying back shares. So increasing the dividend is only one of its cash spending priorities.

Dividend prospects

The FTSE 100 firm does have a progressive dividend policy, meaning that it aims to increase the payout annually.

In practice, though, that will ultimately depend on business performance.

Centrica is targeting a dividend that is around half of earnings per share. Such earnings, as we saw above, have moved around a lot in the past and could do so in future.

Its installed customer base, strong brands and high energy prices are all working in the firm’s favour for now. I do expect the Centrica dividend to keep growing in years to come.

But I do not like the risks in the business, especially its strong reliance on selling a commodity energy that is seeing long-term demand falls. I have no plans to buy the shares.

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 recommended Diageo Plc. 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

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

To build a passive income flow, I’d follow this Warren Buffett approach

Warren Buffett has set up passive income streams most people can only dream about. Our writer sees some practical lessons…

Read more »

Growth Shares

As the boohoo share price falls, could it become a penny stock in 2025?

Jon Smith outlines some of the recent problems involving the boohoo share price and considers if things could get even…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

Here are the worst-performing FTSE 100 shares over the last 5 years

These five FTSE 100 shares have been complete duds over the last half decade. But is there potential for a…

Read more »

Investing Articles

Nvidia stock has tripled this year! Can it keep rising?

Nvidia's latest sales update showed strong growth and the stock's been on a tear so far in 2024. So is…

Read more »