Thursday, 19 February 2015

Centrica's 21% Dividend Cut: Does it Make it a More Appealing Investment?

FTSE 100 utility company, Centrica, which owns the British gas brand in the UK announced today that it had reduced its 2014 Final dividend by 21% to 8.4p per share.

Unsurprisingly this has somewhat rattled investors in the company and the share price has--at the time of writing--dropped about 8.5%. Clearly neither is good news for investors in the company.

However, for us not currently invested in Centrica. Does it make them appealing?

First, let's look at that dividend. Clearly a 21% drop is a hefty change. Overall, Centrica plan to "rebase" their dividend by 30%. But what does it do to the yield?

Well a 30% reduction on the 2013 total of 17p per share would mean a dividend of 11.9p per share.

That is obviously a huge reduction. However, on a share price of about 257p (as it currently stands) that is still a yield of nearly 4.65%. That is still a very good yield indeed.

What is more, of course the cut also make that yield far better covered by earnings. This is the currently predicted earnings (and P/E ratio) for 2015:

EPSP/E Ratio
Difference (%)29.89

Now, with the consensus EPS of 20.56p this would leave the dividend covered about 1.73 times by earnings. Similarly, even with the lowest predicted EPS of 18.17p the yield would be covered about 1.53 times by earnings.

All in all, this looks pretty good to me. A still hefty yield in a low yield environment. What is more, this would make it one of the best covered dividends in the UK utilities sector.

Would I invest in Centrica then? As it stands, no.

They still have significant issues they have to face. Low oil prices is clearly affecting profits in that area. However, perhaps more concerning is the continued haemorrhaging of customers from British Gas. Again Centrica reveals they have lost a further 2% of their residential customers (as well as overstating customer numbers previously). They now have 14,778,000 customers--still the largest in the UK--but this continued customer slide is very concerning indeed.

Over the long term I suspect that Centrica is still a very good investment. Certainly, its dividend cut--although painful--is a wise decision in this regard. 

If the price weakness continues as the year progresses maybe I will start a small position in the company. However, as it stands, I would be far more happy adding to my recently opened position in the UK and US utility and transmission giant National Grid which, incidentally, saw its share price rise by 1.8% (presumably attracting a number of former Centrica investors).

[Creative Commons image reproduced from Flickr user damo1977]

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