3 reasons why I think Centrica will slash dividends again

Centrica plc (LON: CNA) has been able to maintain dividends in recent years, but can it continue to do so? Royston Wild thinks the answer is a resounding ‘no’!

| 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.

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.

It can be mighty tempting to hold onto shares that have nursed huge losses rather than to cut them adrift and endure the pain. No-one likes to admit that they’ve made a crushing mistake, after all.

That said, I think those hanging onto Centrica (LSE: CNA) in the hope of a share price recovery could be considered gluttons for punishment. Its share price remains in freefall, down 35% since the turn of the year, and with no possible catalysts in sight that could help it snap higher.

On the plus side for investors, the company’s resisted the temptation to hack back dividends since it last reduced shareholder payouts back in 2015. A quick glance at City forecasts I reckon the FTSE 100 firm’s about to wield the scythe once again, though, and to reduce the 2019 full-year reward to 7.5p per share, from the 12p paid over the past several years.

I believe, though, the utilities giant may be forced to dial back payments even greater than those suggested by the number-crunchers. And here are three reasons why:

1. Poor dividend cover

Heavy annual profits falls have been a constant feature of Centrica over the past half a decade, and it appears for all the world that another painful drop is in store in 2019. Indeed, City analysts are expecting earnings to contract by a staggering 27%.

What this means is the 7.5p per share dividend they’re predicting is barely covered at just 1.1 times. This falls some way below the widely-regarded safety benchmark of 2 times or above, and leaves the predicted payout looking a tad fragile at best.

2. The battered balance sheet

It’s not as if Centrica has the financial clout to mitigate for this paltry coverage. It doesn’t matter that the business has delivered £900m of savings since 2015 through an intense cost-efficiency programme that’s seen it cut jobs all over the business and double-down on digitalisation… the balance sheet still keeps on flashing red.

Free cash flow for instance, one of those most critical check on a company’s financial health, continues to slide at the energy giant. In 2018, this dropped to a shade over £1.8bn from £2.1bn a year earlier. Meanwhile, net debt grew by £50m year-on-year to around £2.7bn. But this rise is nothing compared to what’s coming down the tracks — Centrica predicts its debt will range £3bn-£3.5bn by the close of this year.

3. A worsening trading outlook

Even if the energy giant had the capacity to pay the dividend expected by City boffins, would it actually be minded to do so given the prospect that profits will keep diving beyond the current year?

Latest financials showed its British Gas retail division lost almost a quarter of a million more accounts between January and April. Meanwhile, the latest data from trade body Energy UK showed the switching frenzy among households is far from over, suggesting that much more pain is around the corner. Some 2.5m people changed supplier in the first five months of 2019, up 14% year-on-year.

As far as I’m concerned, you can keep Centrica’s bulging 8.3% dividend yield. The risks to dividends in the near term and beyond are clearly far too great, and I’d be much happier to go income hunting elsewhere.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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 much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »