Today I am looking at why I believe Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) is a worthy addition to any shares portfolio.
Price slide provides fresh opportunity for bargain hunters
Centrica’s share price shuttled lower last week as the enduring debate over escalating household bills ratcheted up another notch. Energy secretary Ed Davey called on regulator Ofgem to investigate the level of profit generated by the country’s ‘Big Six’ gas suppliers, and even suggested that Centrica’s British Gas subsidiary may need to be dismantled to massage greater competition.
Although the political backdrop appears to be becoming more difficult for the country’s major suppliers to generate decent earnings, I still believe that the chances of regulators initiating an overhaul of the UK energy sector remains slim, particularly as massive investment is required to keep the power grid up and running.
This belief is underlined by positive analyst projections, who expect the firm to rebound from a 2% earnings drop in 2013 to punch a 2% rise this year, and which is anticipated to accelerate to 7% in 2015. These figures leave Centrica dealing on P/E multiples of 11.1 and 11.9 for these years, representing excellent value versus a prospective average of 16.9 for the complete FTSE 100.
Services arm set to fly
Given the continued sabre-rattling from Westminster, the excellent performance at Centrica’s British Gas Services division may have been somewhat overlooked, the firm having seen residential profits from this arm rise a chunky 8% during January-June to £135m.
Even though pressure on consumers’ wallets saw the number of accounts dip slightly in October from the first half of 2013, to 8.3 million, I believe that improving conditions on the back of an improving UK economy — combined with the company’s drive to develop its suite of services products — is likely to push the customer base higher again. Indeed, Centrica has seen central heating installations pick up in recent months, pushing the number of fittings 5% during January-October.
Dividend yields difficult to match
Utilities firms have, of course, been a safe-haven for investors seeking reliable dividend growth, underpinned by the defensive nature of their operations which bolster earnings visibility. However, City analysts expect Centrica’s payout growth to slow from a compound annual growth rate of 6.8% since 2008, as a backdrop of rising operating costs and accusations of exuberant shareholder rewards prompts scalebacks.
Indeed, the annual dividend is forecast to rise by a less-appetising 4.1% in 2014 and by 4.4% next year. But even though yearly growth is forecast to dip, I believe that Centrica should continue to offer bumper payouts far ahead of its big-cap peers, at least over the medium term — yields of 5.7% and 6% for 2014 and 2015 respectively comfortably smash the 3.2% FTSE 100 forward average.