British Gas owner Centrica (LSE: CNA) saw its share price rise 10% when markets opened on Thursday (20 February), after the company unveiled a strong set of results.
Centrica has lagged the wider FTSE 100 over the last year, after a strong recovery from 2021 to 2023. But today’s numbers suggest to me the business remains on track to make sustainable progress. I think this could open the door to further share price gains.
Profits down, dividend up!
Centrica’s operating profit fell 43% to £1,552m in 2024. Despite this, the company unveiled a 10% dividend increase, lifting the payout to 4.5p per share. That’s a yield of about 3.1%, at the time of writing. Shareholders should also benefit from a further £500m share buyback. My sums suggest this should provide good value for money at current levels.
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I wouldn’t normally praise a company for increasing its payouts when profits have fallen sharply. But this is an unusual situation. Centrica’s profits are returning to normal after windfall gains in 2023, when the company’s position as a big gas producer meant it profited from higher energy prices.
The energy group’s accounts show clear support for the dividend and buyback. This business generated nearly £1bn of surplus cash in 2024 and ended the year with net cash of £2.8bn.
Investing for long-term growth
I think Centrica CEO Chris O’Shea knows he’s struck lucky. Not so long ago, this group was struggling with flagging profits and a heavy debt burden.
O’Shea has planned a £4bn investment programme that’s intended to support long-term earnings, improve customer satisfaction and position the company for a gradual shift towards net zero. For example, the company installed nearly half a million smart meters last year.
Centrica also agreed to build two 100MW “flexible hydrogen-ready” gaspower plants in Ireland and extended the life of its four UK nuclear power stations.
Are the shares still cheap?
There are still some risks here. For me, the biggest concern is that Centrica generated nearly half its underlying profits last year from gas production and energy trading on international markets. These businesses can be far more profitable than being a regulated UK utility. But profits can also be much more volatile, depending on commodity market conditions.
On balance, I think this is a risk worth taking. In my view, these businesses may be able to contribute significantly more attractive returns for shareholders than British Gas might do alone.
Centrica’s huge cash pile also means that it’s able to invest in long-term opportunities from a position of strength. If it’s managed well, I think this should be a big opportunity.
Even after this morning’s gains, the shares are only trading on 10 times 2025 forecast earnings. Shareholders should also be able to look forward to a 3.5% dividend yield for the year.
This looks undemanding to me. My valuation estimates suggest Centrica shares could be worth more, even if profits level out. I think this energy stalwart’s worth considering.
