Integrated gas and electricity company Centrica‘s (LSE: CNA) share price is down from its highs just now and I think that makes the firm look attractive.
More than just your average utility
With both upstream and downstream operations in roughly equal proportions, Centrica seems likeable for both its dividend-yielding cash flow and its potential to deliver capital gains via upstream development.
So, with Centrica, if the price is right, we can end up with a pleasing mix of cash-flow backed value and growth at a reasonable price.
Diversity within a company’s operations can be an advantage. Last year, based on location of customer, 66% of Centrica’s revenue came from the UK, 28% from North America and 6% from the rest of the world. So there’s diversity by geographical origin of the firm’s revenues.
In terms of activity, there’s also plenty of diversity. Downstream operations supply both gas and electricity, as British Gas in Britain and as Direct Energy in the US, this is the utility part of the equation, the bit that delivers steady cash flow to underpin Centrica’s tidy dividend record.
Upstream operations involve oil and gas exploration, production and storage activities; owning and operating combined cycle gas turbine (CCGT) electricity-generating power stations; offshore wind generating operations; and a 20% stake in EDF Energy’s UK nuclear power stations. Within those pursuits, oil and gas exploration has, perhaps the greatest ability to drive up Centrica’s share price.
Cyclicality
Variable demand can make it difficult to nail a profit downstream. Demand for energy fluctuates according to factors such as differing weather patterns, and downstream energy suppliers must deal with fiddler’s elbow-like wholesale prices, too. On top of that, British Utility providers face intense scrutiny , and regulation can move the goal posts. Nonetheless, Centrica’s cash flow record is good and the firm does a pucker job of advancing its dividend:
| Year to December | 2009 | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|---|
| Net cash from operations (£m) | 2,647 | 2,428 | 2,337 | 2,820 | 2,940 |
| Adjusted earnings per share | 21.7p | 25.2p | 25.6p | 26.6p | 26.6p |
| Dividend per share | 12.8p | 14.3p | 15.4p | 16.4p | 17p |
I’m keen to see how things are going this year when the firm reports its interim results around the 31 July.
Valuation
Any investment in Centrica is probably best justified by first considering dividend income. On that score, the news is good. The forward dividend yield is running at about 5.5% for 2015 and adjusted earnings cover the payout around 1.4 times.
Meanwhile, we can currently pick up the shares on a forward P/E multiple of almost 13, with city analysts forecasting an 8% earnings’ uplift next year. That strikes me as a fair price for Centrica’s growth potential.