In this article, I am looking at why Centrica (LSE: CNA) appears to be a lucrative medium-term dividend provider.
Expect exceptional dividend growth
Centrica, like the rest of the British utilities sector, remains at the mercy of potentially earnings-crippling legislation to ease the burden of rising household bills. Although a subsequent reluctance to lift energy tariffs is likely to lead to a double-digit earnings fall for Centrica this year, the firm is still expected to keep dividends rolling, in turn producing a tasty 5.4% yield.
This figure is created by City forecasts of a 17.6p per share dividend, up from last 2013’s full-year payment of 17p. And Centrica is
anticipated to raise this still further to 18.2p in 2015, in turn producing a massive yield of 5.6%.
Not only do these readouts make mincemeat of a forward average of 3.2% for the complete FTSE 100, but a prospective yield of 4.6% for the complete gas, water and multiutilities sector is also comfortably surpassed.
However, the country’s utilities providers are bracing themselves for a fresh flurry of political grandstanding ahead of next year’s UK general election as candidates bid to curry favour with voters. This is a situation which could have huge ramifications for future earnings and dividend expansion.
Politicians have been queuing up to batter the sector’s profit-making practices since last autumn, when Labour leader Ed Miliband vowed to freeze electricity prices for customers should his party succeed at the ballot box in 2015. This aggressive posturing prompted energy secretary Ed Davey to speculate in March that Centrica could be broken up to stimulate competition.
And Ofgem turned up the heat in recent days by announcing that wholesale gas and electricity prices are now 38% and 23% lower than those seen at the same point in 2013. And the regulator directly challenged the UK’s ‘Big Six’ energy operators by asking them ‘to explain to customers what impact falling wholesale costs will have on their energy prices.’
I have previously argued that a significant shake-up of the UK energy sector from Westminster remains highly unlikely, particularly given the large amount of investment needed to keep the lights on. But the landscape appears to have shifted significantly in recent months, and the likes of Centrica may have to keep a lid on future price hikes in order to keep lawmakers sweet.
So although the energy play may be a lucrative dividend pick for the medium term, the possibility of game-changing legislation could deliver a hammer blow to earnings and dividend growth in coming years. Thus I believe that Centrica may not be a wise pick for risk-averse investors.