Centrica (LSE:CNA) shares are ranked amongst the top three FTSE 100 performers over the last year. Being a seasoned UK energy giant, its shares have jumped 48% in the last 12 months of trading. And I think this could be the start of a big bull run in 2023. 

The surge in its share price is primarily because of the energy crisis in the UK and Europe. Rising fuel costs are causing strong inflation in the region. Germany was in the news earlier this week when inflation hit its highest level in almost 50 years. Nine other countries in the region have registered double-digit annual inflation, thanks to a big spike in August. 

A recent report from the International Energy Agency showed that coal prices will remain close to all-time highs for at least the next six months. As a result, energy companies could see a further surge in earnings in 2023. And I think investors have rightly been clamouring to buy renewable energy shares in the UK while they are still cheap.

Centrica share price has strong momentum

Centrica is one of the largest suppliers of electricity and natural gas to consumers in the UK and Ireland. The company operates British Gas, which provides gas to over 9m homes across the country. 

Just this week, UK wholesale gas price tumbled by more than 20% thanks to Centrica’s efforts to reopen UK’s biggest gas storage facility located under the North Sea. However, despite this drop, prices still remain 12 times higher than 2021 levels.

While many investors will look at this as a step to reduce gas prices, I think this still benefits the firm. Gas storage facilities will now maintain reserves at 80% capacity. This is to avoid any abrupt supply disruptions when Russia further reduces gas exports before the winter. This means that British Gas‘ reserves could quickly jump in value again if reserves drop in early 2023.

This is the main reason why I think Centrica shares look cheap right now despite the 143% rise since 2020’s crash. At 77.8p, its share price is currently 20% lower than 2022’s highs of 93p. And I think the company can post new post-pandemic highs if current demand continues in 2023. 

Concerns and verdict

However, this is firmly dependent on how the UK government handles the current energy crisis. Relief measures, including cash payments to households, have been deployed to reduce the impact on the public. European leaders are turning to other major exporters like the Middle East and the US. However, given the demand, this could become expensive.

The price of crude oil is a big factor that Europe and UK will have to address. Companies, including Centrica, have an established renewable energy network. But if they are forced to increase green energy capacity, it could put pressure on operations and cash reserves. This could put off investors as profit margins and revenue will be affected. 

While this energy crisis is concerning, it also presents an opportunity. Centrica holds prominent green energy assets and is a market leader in the UK. The gas giant could play a substantial role in providing the infrastructure to help the UK transition.

I am bullish on the company and could be tempted to invest in Centrica shares if there is a significant correction in the coming months.  

The post Here’s why Centrica shares could be a big winner in 2023 appeared first on The Twelfth Magpie.

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Suraj Radhakrishnan 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.

Now, I’m not fond of buying shares after a such great run. After all, while market timing is not a smart game to play, neither is ‘buy high, sell low’!

But here’s a couple of great reasons why I believe that Centrica’s share price run might not yet be over.

Will Centrica restart paying dividends?

Will it or won’t it restart paying a dividend? We’ll know on Thursday, when Centrica declares its first half results. But certainly the expectation is yes, and that’s got to be a good thing for the Centrica share price.

Like many others, the group, perhaps still better known as British Gas to most, suspended its dividend back in 2020 while pandemic uncertainty was at its highest.

Previously, though, it had been a reasonably consistent dividend payer, with a smooth growth rate throughout 2000–2013:

If things go as expected on Thursday, analysts expect Centrica’s chief exec, Chris O’Shea, to confirm an interim dividend of 1p and a final yearly dividend of around 3p-3.5p.

That would give a forecast yield of around 3.5%. Which while not exceptional, it’s certainly back in contention with other popular shares like Lloyds. But I think there’s even more potential for upside on the Centrica share price.

Can Centrica profit from winter gas price volatility?

It’s hard to escape from the news that this winter could be tough on the energy front. With the Russia/Ukraine war continuing to impact gas prices it’s only going to get tighter as demand goes up later this year.

Previously, energy traders would use gas storage to monetise volatility in the gas markets. The closure of Rough, the UK’s main gas storage facility, back in 2017, pretty much took that option (pun intended) off the table.

The closure was driven by cheap energy prices (remember those?!) and ever-rising maintenance costs making it uneconomical to run. Clearly, it’s a different picture these days, with prices sky-high as Russia continues to threaten to cut gas supplies to Europe.

With a UK Government keen to increase energy security, it will make for an interesting conversation with Centrica on how much they are prepared to pay to help support the reopening of Rough.

Are Centrica shares a risk worth taking?

As with all predictions, they may or may not come to pass. Pressure on the government, whoever ends up leading it, to “do something” may well see more painful decisions for Centrica. It’s not impossible to see rises ahead for the new Energy Windfall tax introduced earlier this year, for example.

But overall, I think there’s some real positive potential behind the Centrica share price for the first time in a long while. I’ll be keeping a close eye on them when it comes to my next share purchase for sure.

The post Centrica share price: 2 good reasons it may burn hotter yet! appeared first on The Twelfth Magpie.

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Michelle Freeman has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

Having blown cold on the stock for so long, should I regard this fall as a golden opportunity to finally climb on board?

Profits double!

On a day when most investors are hiding behind their sofas, the numbers from the British Gas owner make for pleasant reading. One, in particular, stood out for me: adjusted operating profit rocketed 112% to £948m in 2021. No wonder the Centrica share price has been motoring for the last nine months or so. 

No doubt some investors have been tempted to get involved following actions taken by management to make Centrica a leaner beast after losing so many customers to rivals. Direct Energy was sold last year and the disposal of Spirit Norway has also been agreed. This has helped boost Centrica’s balance sheet. In fact, the company finished 2021 with net cash for the first time in many years (£0.7bn). That’s really made me sit up and take notice. 

“Broadly positive” outlook

Of course, there’s only so much weight I should give today’s results when it comes to making an investment decision. It’s Centrica’s outlook that’s arguably far more important.

Today, the £4.5bn cap business said that it was “broadly positive” on trading in 2022. That’s not exactly bullish but it’s probably realistic considering the “wider range of outcomes” noted by the company as a result of high commodity prices. The possibility of further regulatory changes is another potential headwind.  

Opportunity knocks?

Centrica shares currently trade at 11 times earnings. That’s a low valuation relative to its industry and the market as a whole. So, am I interested in buying now?

Well, there are a few things that keep me wary.

Perhaps most prominently, I need to remember that Centrica has absolutely no control over pricing. As an indication of this, the company stated that it was still too early to say what the impact of Russia’s invasion of Ukraine would be. I prefer to own stakes in companies with more say in their destiny. 

Another thing worth noting is the lack of dividends. That’s hardly surprising for a turnaround stock. However, I like the idea of being compensated for my patience if/when the Centrica share price goes into reverse as it has today.

On a positive note, total free cash flow jumped 71% to £1.17bn in 2021 so perhaps holders won’t have too much longer to wait? The company did also say today that there was now a “clear path to restart paying a dividend”. Personally, I’ll wait until I see it.

My verdict

As encouraging as today’s results are, I don’t think they’re enough to radically alter my feelings about this stock. If I did have the cash to spare right now, I’d be taking full advantage of the market crash and buying shares in higher-quality companies elsewhere in the UK market. 

Yes, this FTSE 250 member may have done well over the last year, but I’m under no illusion that a full recovery for the Centrica share price may be many years away, if it comes at all. As someone who is looking to compound his wealth, that doesn’t appeal. 

The post The Centrica share price falls as profits double. Time to buy? appeared first on The Twelfth Magpie.

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Paul Summers 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.

Up and down

The Homeserve share price is up a stonking 238% over the past five years, and with a market cap of £4.27bn, it is knocking on the door of the FTSE 100. It’s only slightly smaller than British Gas owner Centrica (LSE: CNA), which is clinging on to its place in the FTSE 100, after seeing its share price fall 50% over the last year alone.

Homeserve is a momentum stock that seems to have further to run, while Centrica is a falling knife that just won’t stop. Both look tempting, but for opposing reasons.

Homeserve’s revenues jumped 13% to £457.7m in the six months to 30 September, while statutory profit before tax climbed 2% to £19.7m. In North America, continued profitable growth saw customer numbers rise 13% to 4.2m and adjusted operating profit jump 24% to $23.4m. The group has now acquired a controlling stake in US-based home experts business eLocal for around $140m.

Its core business is home assistance membership in the UK, US, France and Spain, which offers protection against an unexpected plumbing, heating or electrical emergency. It therefore appeals to risk-averse customers, who I suspect are also relatively older and financially solid, giving protection against a downturn.

Some like it hot

Homeserve aims to underpin its growth with strong cash generation and a robust balance sheet, and it has maintained its progressive dividend policy, hiking the dividend 12% to 5.8p today, which reflects “continued confidence in the group’s growth prospects”. The current forward yield is 2%, covered 1.7 times.

The danger is that Homeserve is priced for growth, trading at 28.1 times forward earnings, so any setbacks could knock that. However, earnings are forecast to grow 9% this year and 11% next. It looks like a buy to me, especially if we get a correction at any point.

Things are so bad at Centrica, by contrast, that it has been selling off as much of its business as it can, including its stakes in wind farms, power stations, nuclear plants and oil and gas firm Spirit Energy, while taking an axe to costs. 

In July, it reported a pre-tax loss of £446m for the six months to June, down from a £704m profit the year before, so nobody was surprised by the whopping 60% dividend cut.

Risky bargain buy

The Centrica share price peaked at 400p over five years ago, but today you can pick it up at just 75p, around 10 times forward earnings. On the positive side, City analysts reckon those earnings could rise 36% next year.

By then, the forward yield will be 6.9%, covered 1.9 times by forecast earnings (despite that 60% cut). The group is looking to deliver more stable, streamlined earnings and a more resilient balance sheet. If it can manage that, now could be a good time to buy, although you need to be brave given the punishment Centrica has dished out to shareholders lately. 

The post £2k to invest? I’d buy this FTSE 250 growth stock and FTSE 100 falling knife Centrica appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Homeserve. 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.

The question now is whether Centrica’s finally turned the corner, or whether September’s performance is a mere interlude in an entrenched downward trend. Let’s have a look at why the shares advanced 6% over the month.

Broker news

Centrica released just two inconsequential notices on the regulatory newswire in September, so we have to look elsewhere for drivers of the movement in the share price.

There was a fair bit of broker news on the stock. JP Morgan Cazenove reiterated its ‘neutral’ rating in the first week of the month, but cut its price target from 110p to 75p. Similarly, in the second week, Berenberg reiterated its ‘hold’ rating, but cut its target from 140p to 80p. The market brushed off the target downgrades, perhaps focusing more on Berenberg’s view that the stock is inexpensive and the firm could be a candidate for a takeover bid.

Moving further into the month, there was unequivocally positive broker news. Describing Centrica as a “value wildcard,” Jefferies upgraded its rating from ‘hold’ to ‘buy’ and put a 90p price target on the stock.

On the company’s strategy for stabilising the business, the broker said: “Clearly, there are execution risks relating to cost-cutting measures and disposals, but with the stock trading at a 50% discount to the utility sector (at historical lows of 8x forward price-to-earnings) and offering 6.7% cash yield, we see the risk-reward as attractive.”

Talks and shorts

On the subject of Centrica’s planned disposals, its shares were buoyed mid-month by a Sky News report. This claimed a consortium of infrastructure investors is in advanced talks to buy a 20% stake in the UK’s nuclear power stations for £1.2bn from Centrica and EDF Energy.

Meanwhile, short positions in the stock held by investment giant BlackRock and hedge fund Marshall Wace were at a peak of 2.21% (worth £90m) in early September. This reduced to 2.07%, with Marshall Wace modestly lowering its position (i.e. buying shares) over the course of the month.

The buying by the short-seller may have added a little further support for Centrica’s share price on top of that provided by the broadly positive broker commentaries and Sky News report.

Value wildcard

So far in October, Centrica has given up its 6% September gain and more, down 8% at the time I’m writing. There’s been no material news I can see for the dip, so it looks like fickle short-term sentiment is driving things at the moment.

However, I think Centrica is fundamentally cheap, if it can successfully execute on its cost-cutting and disposals strategy. As such, and given the size of the discount to its utility peers, I agree with Jefferies’ characterisation of it as a “value wildcard.“

Personally, though, I see some better value opportunities in the market. However, if I already owned Centrica shares, I’d be inclined to continue to hold them, and await concrete news on cost-cutting and disposals.

The post Why the Centrica share price rose 6% in September appeared first on The Twelfth Magpie.

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G A Chester 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.

According to my calculations, the two are currently the bottom-ranked FTSE 100 companies. They’re poised to be pushed out of the blue-chip index by FTSE 250 firms Polymetal International and Hikma Pharmaceuticals, which both occupy automatic promotion slots.

Do I think now is a good time to buy shares in any of the four companies?

No spark at Marks

Marks & Spencer has been in the FTSE 100 ever since the index was established in 1984. It narrowly escaped demotion at the last quarterly review, but I think it would take a miracle for it to dodge the bullet this time around.

The sinking value of the company, and the humiliation of its demise from blue-chip bellwether to just another mid-cap retailer, is symbolic of the troubles on the UK high street, but also testament to M&S’s repeated failures to successfully adapt its business over the last two decades.

It may have a single-digit P/E and high dividend yield, but the bottom line is this is a structurally challenged company in a structurally challenged sector. Is it a stock I need to own? No, has been my answer for a long, long time. And I continue to see it as one to avoid.

Mad cap

Arguably, Centrica, which also trades on a low P/E and high yield, is a similarly challenged company. However, it’s a utility, not a retailer, and while it has some similarities with M&S in the consumer-facing part of its business, the main challenges it faces are rather different.

Regulatory headwinds, notably a price cap on certain tariffs imposed on energy companies earlier this year, have had a damaging impact on profitability in the sector, and even on the viability of some companies. History suggests heavy-handed regulatory price caps, which produce market distortions and unintended disincentives, get discarded sooner or later. And for this reason, I wouldn’t entirely write Centrica off.

For sure, it faces a host of challenges, but I think the business can survive and recover when the madness and pernicious consequences of price caps become apparent, and policy is changed. Personally, I wouldn’t buy the stock today, but if I owned it I’d be inclined to continue to hold.

Two I’d buy

I named gold miner Polymetal as my top share for 2019 at the start of the year. Despite the strong rise that’s taken it to the brink of entry into the FTSE 100, I still see value in the stock and rate it a ‘buy’. It has a low double-digit P/E and forecast high-teens earnings growth, as well as a decent 4% dividend yield.

Generic medicines firm Hikma is more highly rated, on a high-teens P/E and with a sub-2% dividend yield. The company has yo-yoed in and out of the FTSE 100, but I think the long-term outlook for the business is so promising that it’ll become a fixture in the top index in due course. As such, I also rate this one a ‘buy’.

The index changes announced by the FTSE on Wednesday will take effect from Monday 23 September.

The post Marks & Spencer and Centrica set for FTSE 100 exit. Time to buy? appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.

However, utilities still offer investors one compelling benefit – electric yields. Is that reason enough to invest?

Working on water

Pennon’s share price dipped slightly after it posted a 1% drop in statutory profit before tax to £260.1m in this morning’s full-year results. However, taking a more positive view, that worked out as an 8.3% rise on an underlying basis to £280.2m after non-underlying items of £19.9m, broadly comparable with last year.

The group also posted a 6.1% rise in underlying revenues to £1.48bn, and a 8.4% gain in underlying operating profit to £350m. Management hailed a “robust performance in 2018/19”, in line with expectations, including £17m of efficiencies. The dividend per share increased 6.4% to 41.06p and the stock now offers a forward yield of 6%, with cover of 1.3.

Waste not, want not

Pennon has to keep investing in the business, pumping in £650m in the current regulatory period, and more than £7bn in total since 1989. Its stock has fallen 22% in the past two years, but that leaves it trading at 12.8 times earnings, a tempting entry point for long-term income seekers.

The group operates both South West Water and Viridor Recycling, and the latter has benefited from the ‘Blue Planet effect’, boosting recycling rates. As Roland Head points out, water gives stable cash flows while recycling offers greater growth prospects, as seen in Viridor’s EBITDA growth of +19.1%. It could nicely underpin your portfolio, unless you fear a Corbyn-style asset snatch.

Low energy

That shadow hangs over Centrica too, but that isn’t the only reason for its dismal share price showing, or even the main one. Centrica stock trades a whopping 75% lower than five years ago as a customer exodus, mild winters, nuclear outages, volatile energy prices, softening upstream revenues, and the energy cap combine to menace profits.

One thing undoubtedly tempts – a forward yield of 11.2%. However, this isn’t to be relied on as almost everyone expects it to be cut soon. There’s a precedent… Centrica cut by 30% in 2015.

That said, a cut wouldn’t be the end of the world given today’s outsize income stream. Even a 50% drop would still give a juicy yield of around 5.5%. If you’re serious about buying Centrica you might be tempted to wait until after the cut, although I suspect it’s already in the share price.

Price looks right

Earnings per share have fallen for five successive years and a further 12% drop is expected in the year to 31 March 2019. However, City analysts reckon earnings could rebound 19% the year after, even though revenue growth looks flat.

GA Chester reckons Centrica has fallen so far it finally looks cheap enough to buy, valued at just 9.9 times forecast earnings for 2020. Now could be a good time to take a position, nationalisation threats notwithstanding.

The post I’m tempted by the low Centrica share price despite a looming dividend cut appeared first on The Twelfth Magpie.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended Pennon Group. 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.

Here, I’ll look at whether it could now be the buy of the century. And whether ambitious energy consultancy Inspired Energy (LSE: INSE), which released its annual results today, could also offer rich pickings for investors.

Growth at an attractive price

Inspired supports its clients with their energy needs, including selecting the best supply contracts, validating energy invoices, meeting compliance obligations on energy and environmental reporting, and increasing effectiveness of energy consumption. In short, “optimising the value of every pound our clients spend on utilities, so that they can focus on running their businesses.”

The company today reported record revenue, with its large corporate division contributing 84% and its SME division 16%. Total revenue of £32.7m was up 24% on the prior year, helped by five strategic acquisitions. Meanwhile, pre-tax profit increased 35% and earnings per share (EPS) by 26%.

Inspired has become a leading procurement consultant to UK and Irish corporates. And in a highly fragmented market, it has considerable scope for further strong acquisitive and organic growth. I see good potential for it to become a significantly more valuable company than its current market value of £131m.

The shares opened 6% higher at 18.38p this morning, and with EPS of 1.68p, the price-to-earnings (P/E) ratio is 10.9. I reckon this is an attractive valuation, and that a 0.65p dividend (up 18%), giving a yield of 3.7%, adds to the investment appeal. As such, I rate the stock a ‘buy’.

Negative view

Centrica is a stock I’ve been bearish on for a long time. However, it’s nine months since I last wrote about it. The share price was a bit above 150p at the time, but has since sunk to a 20-year low — 116p, as I’m writing.

Nearly every stock has a price at which it offers investors good value. Could this now be the case with Centrica? Indeed, could it perhaps have become the biggest blue-chip bargain in the market?

There were a number of reasons for my previous negative view on the company. Regulator Ofgem was flexing its potentially-profit-sapping muscles, competition in the industry was intense, and Centrica’s British Gas business was haemorrhaging customers. Has anything changed since?

Improving outlook

There have been some positive developments. Customer departures slowed dramatically in the second half of 2018. This came as numerous smaller energy suppliers went bust, the cheap deals they were offering proving unsustainable. And while the regulator’s default tariff price cap, which came in at the start of this year, isn’t the best news for Centrica, I think it’s likely to be a lot worse for the smaller players.

City analysts have EPS bottoming out at 9.8p this year, followed by 20% growth to 11.8p in 2020. This gives a current-year P/E of 11.8, falling to a bargain-basement sub-10 next year. The company’s running 12p dividend (10.3% yield) may have to be rebased, as cash flow this year looks likely to be tight, but a cut appears to be already priced in.

On balance, while I don’t think Centrica is the FTSE 100 bargain of the century, I reckon the share price is sufficiently low, and the outlook sufficiently improved, to move to rating the stock a ‘buy’.

The post Is the Centrica share price now the FTSE 100 buy of the century? appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

G A Chester 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.

Today, the company released its half-year results and its shares head the FTSE 100 fallers board as I’m writing. They’re down 5% to 145p. Adjusted earnings per share (EPS) came in 22% lower than in the same period last year and trailing 12-month EPS now stands at 10.8p. Meanwhile, the board maintained the interim dividend at last year’s level, so the trailing 12-month dividend is 12p.

At the current share price, the price-to-earnings (P/E) ratio is a modest 13.4 and the dividend yield is a whopping 8.3%. These are strong value credentials on the face of it, but let me explain why I continue to see Centrica and fellow FTSE 100 high-yield value candidate Taylor Wimpey (LSE: TW) as stocks to sell.

Headwinds

Chief executive Iain Conn said Centrica “demonstrated resilience” in a first-half of “rapidly rising commodity prices, extreme weather patterns, continued competitive pressures and ongoing political and regulatory uncertainty.”

Group revenue increased 7% to £15.3bn from £14.3bn but adjusted operating profit fell 4% to £782m from £814m. In Centrica’s consumer business — its largest division — adjusted operating profit dropped 20% to £430m. The number of UK residential customers fell by 341,000 over the six months to 12.5m, and while this was 36,000 fewer losses than in the same period last year, the continuing flight of customers is one of the biggest reasons for my bearish view on the company.

Centrica’s management puts the loss of customers down to “the highly competitive nature of the residential supply market.” If so, pressure on retaining customers and on profit margins is likely to continue, with government and regulators determined to keep the market as competitive as possible for the benefit of consumers. Measures to this end are set to include a market-wide price cap of the Standard Variable Tariff and other default tariffs to counter what prime minister Theresa May has called “rip-off prices.”

Cash flow and dividend

Shareholders will have been relieved that Centrica announced it expects to maintain the dividend at 12p this year, although it came with a proviso, “subject to delivering adjusted operating cash flow and net debt in line with our target ranges.” In the case of the former, it delivered £1.1bn in the first half and the full-year target is between £2.1bn and £2.3bn. In the case of the latter, net debt stood at £2.9bn at the half-year-end and the year-end target is between £2.5 and £3bn.

When Iain Conn took up the chief executive role on 1 January 2015, he conducted a strategic review. He concluded that Centrica’s focus should be on its consumer-facing businesses. He slashed the dividend by 30% but said the company aimed to “deliver at least 3% to 5% per annum underlying operating cash flow growth to 2020 … so underpinning a progressive dividend policy.”

The base level for the growth in annual underlying operating cash flow was just over £2bn in 2015. Last year, Centrica delivere … just under £2bn. Meanwhile, the progressive dividend has yet to advance beyond 12p and the consensus of City analysts is for a cut next year. I see a struggling business, running hard just to stand still and facing continuing multiple headwinds. It is for these reasons that I rate the stock a ‘sell’.

Tempting proposition

In contrast to Centrica, housebuilder Taylor Wimpey has enjoyed a long period of booming top- and bottom-line growth. In its half-year results today chief executive Pete Redfern said: “With a strong order book in place, we are confident in our prospects for the remainder of the year and looking further ahead.”

I turned bearish on Taylor Wimpey last autumn. In spite of its low forward P/E (10.1 at the time), I noted that its operating profit margin of 20.8% and price-to-tangible book value of 2.1 times were at levels we tend to see at the boom end of the housing cycle. And with consumer debt at historically unprecedented levels and interest rates moving into a rising cycle, I felt it was a good time to take profits on the housebuilder at 194p.

The market often begins to price-in the next housing bust, even while housebuilders are still reporting robust earnings and City analysts are forecasting continuing earnings growth. As a result, the forward P/E gets lower and the prospective dividend yield higher, and the stock appears a very tempting proposition. I see this happening now, with the shares currently trading at around 175p and the forward P/E down to 8.5 and dividend yield up to 8.7%.

Time to be prudent

Many of my Foolish colleagues are tempted by Taylor Wimpey’s ‘cheap’ valuation in the belief that the market’s got it wrong in starting to price-in a significant downturn. However, since pointing to the risks of record levels of consumer debt and rising interest rates back in November, I’m seeing further worrying signs that the housing market (and housebuilders) could be heading for trouble.

Consumer confidence isn’t great as an uncertain Brexit looms nearer. When people fear house prices could fall, the risk of taking on a mortgage seems higher and they put off buying. There has also been a big rise in banks valuing properties for less than their sale price. Indeed, the number of so-called ‘down valuations’ has increased from one in 20 to one in five over the last two years, which is the highest level since the 2008 financial crash. We’re not yet seeing reduced mortgage availability and stricter lending criteria, but it could be coming over the horizon.

Housebuilders (and their shareholders) have enjoyed a terrific period of boom, but this a notorious boom-and-bust industry. With “it’ll be different this time” being probably the most dangerous belief an investor can adopt, I continue to see Taylor Wimpey as a stock to sell. There’s a time to be greedy and a time to be cautious with highly cyclical stocks, and I lean towards the latter at this stage.

The post Why the Centrica share price and 8.3% dividend yield leave me cold appeared first on The Twelfth Magpie.

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G A Chester 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.

“Weak” second half

Having released a shock profit warning last November, today’s numbers were never expected to be impressive. That said, the scale and speed of Centrica’s decline are concerning.

As a result of significantly reduced profit in its Business energy supply units, adjusted operating profits fell 17% (from £1.5bn in 2016) to £1.25bn in 2017. Earnings before interest, tax, depreciation and amortisation (EBITDA) dropped 9% with adjusted operating cash flow tanking 23% as a result.

Reflecting on today’s figures, CEO Iain Conn stated that Centrica’s financial performance in the second half of the financial year had been “weak“. He went on to remark that political uncertainty, the likelihood of increased regulation in the UK, the departure of customers to competitors and poor performance in North America had “created material uncertainty” around the company leading to “a very poor shareholder experience“. It’s hard to disagree with that.

Looking ahead, Centrica now plans to increase its cost saving targets to £1.25bn per annum (from the original £500m) by 2020. And 4000 more jobs will go, mostly from its UK energy supply business. Perhaps understandably, the company has also reassured investors that it does not intend to make any major acquisitions.

The biggest question on many shareholders’ lips, however, is surely what will happen to the company’s payouts if poor performance continues?

Ready for the chop?

Today’s full-year dividend of 12p per share leaves the company offering a worryingly high yield of 8.9%.

While some may take heart from Centrica’s desire to maintain the dividend at this level, it’s worth pointing out that this is dependent on the Windsor-based business meeting its cash flow and debt targets. According to today’s statement, these are between £2.1bn and £2.3bn for the former and within a range of £2.25bn to £3.25bn for the latter. Capital expenditure also needs to remain below £1.2bn. 

Given the very real possibility of the proposed cap on standard energy tariffs coming into force, it’s likely that these numbers will need to be revised at some point in 2018. If a dividend cut does come, expect the share price to react accordingly. 

Buyer beware

Centrica’s woes are yet another reminder of the need to check whether a company’s dividend policy is realistic. Aside from avoiding sky-high yields and looking at the extent to which payouts are covered by profits, it’s also important to scrutinise by how much dividends have grown over the last few years (if at all). The fact that Centrica’s dividend hasn’t budged since 2015 says a lot. Regular hikes to the dividend imply a company in rude health. A stagnant dividend suggests the opposite.

Holding a diversified portfolio, regardless of your investing strategy, can also be a wealth-saver. With the exception of a complete meltdown in the markets, you can be assured that your other holdings will help mitigate any losses from one or two nightmare holdings.  As things stand, Centrica’s is surely an example of the latter.

The post Should investors in Footsie income stalwart Centrica prepare for a dividend cut? appeared first on The Twelfth Magpie.

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Paul Summers 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.