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.

Should you invest £1,000 in ITV right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if ITV made the list?

See the 6 stocks

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.

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

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 buy ITV shares today?

Before you decide, please take a moment to review this first.

Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.

It’s called ‘5 Stocks for Trying to Build Wealth After 50’.

And it’s yours, free.

Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.

That’s why now could be an ideal time to secure this valuable investment research.

Mark’s ‘Foolish’ analysts have scoured the markets low and high.

This special report reveals 5 of his favourite long-term ‘Buys’.

Please, don’t make any big decisions before seeing them.

Claim your free copy now

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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

piggy bank, searching with binoculars
Investing Articles

An underrated value stock? I think investors should take a closer look

This value stock appears overlooked by the market. And that’s quite rare right now as the stock market recovers from…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

Up 35% in a month! But is this electrifying UK growth share a total gamble?

Harvey Jones wishes he'd had a flutter on gaming group Entain last year, as it's now smashing the FTSE 100.…

Read more »

Investing Articles

Should I buy the most popular FTSE 100 stock on AJ Bell?

Our writer can see the appeal of this recently popular dividend stock from the FTSE 100 index. But will he…

Read more »

Cargo containers with European Union and British flags reflecting Brexit and restrictions in export and import
Investing Articles

UK shares are booming again as the FTSE recovers! Here’s what I’m watching

Mark Hartley takes a deep dive to see which UK shares are lagging behind in the current market rally. Has…

Read more »

Businessman hand flipping wooden block cube from 2024 to 2025 on coins
Investing Articles

I bought 1,779 Legal & General shares 2 years ago – see how much dividend income I’ve got since

Harvey Jones holds Legal & General shares and has been pretty underwhelmed by their performance so far. The dividend is…

Read more »

Middle-aged black male working at home desk
Investing Articles

Is the FTSE 100 set to soar? Here are 3 ways to aim to cash in

My outlook for the FTSE 100 is definitely brightening as we get deeper into 2025. How can we make the…

Read more »

Investing Articles

£10k invested in NatWest shares on the ‘Liberation Day’ dip is today worth…

Harvey Jones looks at how NatWest shares have been knocked off course during recent market turbulence, but are now bouncing…

Read more »

Tariffs and Global Economic Supply Chains
US Stock

£5,000 invested in Nvidia stock just before the tariff news is now worth…

Jon Smith talks through the erratic movements in Nvidia stock over the past six weeks and reveals where an investor…

Read more »