How much second income would I get if I put £10k into dirt cheap Centrica shares?

Centric shares have been looking incredibly cheap despite rocketing in recent years. Harvey Jones wonders whether this is an opportunity or a threat.

| 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.

Young Asian man drinking coffee at home and looking at his phone

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.

I’m building a portfolio of FTSE 100 shares that should give me a high and rising second income from dividends when I retire.

I started off by targeting some of the highest yielders on the index, such as M&G and Phoenix Group Holdings. Both yield around 10%, which is astonishing. Even more astonishingly, I think both could be sustainable, but there are no guarantees.

Unfortunately, neither have delivered much share price growth lately. So I’m looking for stocks that don’t just pay income, but offer potential capital growth as well. Centrica (LSE: CNA) shares have caught my eye.

Seeking share price growth

Centrica looks like one of the great unsung heroes of the FTSE 100. Its shares don’t seem to generate that much interest among private investors, yet have been going gangbusters. They’re up 145% over three years, and 21.04% over the last 12 months.

That stellar three-year performance is mostly down to the energy shock though, with oil and gas prices rocketing following Vladimir Putin’s invasion of Ukraine. As energy prices have calmed, so has the Centrica share price.

But not entirely. It’s recaptured some of its vigour, jumping almost 10% in the last month. And here’s the thing, the stock is still really cheap, with a price-to-earnings ratio (P/E) of just 4.07 times earnings.

I suspect that’s because investors expect those earnings to retreat from recent highs. In fact the forward P/E is actually higher at 7.71 times earnings in 2024, and climbs again to 10.3 times in 2025. Typically, P/E projections fall over time.

Just a week or two ago, all the talk was about oil topping $100 a barrel. Now it’s sliding towards $80. That will hurt Centrica.

Yet its shares still look tempting, and I’m not the only one who thinks so. Last week, UBS said it viewed the shares as cheap and lifted its target price from 165p to 170p “due to higher cash generation in 2023 and lower decommissioning provisions”. Today, Centrica trades at 138p, so that’s a potential 23% increasel.

Net cash always helps

UBS noted that Centrica should have around £3.5bn in excess capital through to 2028, offsetting the anticipated drop in earnings due to falling energy prices.

Centrica also owns British Gas, which brings diversification but risks too. Its dominant market position has been unchallenged as comparison site switching dried up. When switching returns, British Gas is likely to shed customers to smaller rivals. Switching could further squeeze margins as suppliers battle for business.

If I invested £10k in Centrica today, its forecast yield of 3.42% would give me income of £342 in 2024. In 2025, when it’s forecast to yield 3.99%, I’d get a little bit more. And you know what? I’m tempted.

The investment case is bolstered by Centrica’s net cash position of £2.74bn. I’m looking for exposure to the oil sector, and my eyes originally alighted on BP, but I’m turning my attention to Centrica now. I plan to buy it first. Not just for that second income, but for its growth prospects too.

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.

Harvey Jones has positions in M&g Plc and Phoenix Group Plc. The Motley Fool UK has recommended M&g 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

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 »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

Should I follow Warren Buffett and sell my favourite shares?

Billionaire US investor Warren Buffett has been selling tons of Apple shares and other stocks of businesses he thinks are…

Read more »