The shares of FTSE 100 utility Centrica (LSE: CNA), currently trading at 327p, have risen 35% over the last five years, lagging the 58% gain of the index.
But the story could change over the next five years, as Centrica’s shares have the potential to surge 54%, with a good income on top.
Here’s how
Investors don’t expect massive outperformance from regulated utilities, such as Centrica, the owner of British Gas. The trade-off for what should be relative predictability is unexciting capital appreciation and a decent income. On the equity spectrum, we’re talking about relatively low risk for a relatively low — but steady — reward.
However, with regulation comes the risk of political interference: for example, actions to benefit customers’ bills at the expense of shareholders’ returns. Right now, energy suppliers are under intense pressure, with an independent competition review in the offing, and threats a future Labour government would freeze prices and break up the ‘Big Six’, which includes Centrica.
City analysts can’t factor such a fundamental thing as a company break-up into their earnings projections. They can only deal with things broadly as they are. In the case of Centrica, earnings come not only from British Gas, but also a US utility business, and international upstream operations.
Analysts are forecasting that group earnings per share (EPS) will increase at a modest compound annual growth rate of about 3.5% from last year’s 26.6p to around 31.5p by the year ending December 2018 — a total increase of 18.4%.
If the shares were to track earnings, and continued to rate on their current trailing price-to-earnings (P/E) ratio of 12.3, the price would of course rise by the same 18.4%. However, the political furore should be long resolved by then — one way or another — and if relative certainty and predictability has returned, Centrica’s shares may rate in line with the FTSE 100’s long-term average historic P/E of 16. We’d then see the price at 504p — a 54% rise from today’s 327p.
Investors would also bag five years of chunky dividends. Analysts see dividend progression from last year’s 17p (trailing yield 5.2%) to about 21.5p for 2018 — an income rise of 26%. Forecasts suggest a total of 97p a share paid out over the period. Put another way, a £1,000 investment in Centrica today would deliver £297 in dividends alone.