Today I am looking at why Centrica (LSE: CNA) could be considered a bona fide bargain at current prices.
Smashing yields expected to reign
The effect of mounting political and media pressure has weighed heavily across the utilities sector for close on a year now. Since Labour leader Ed Miliband’s pledge last September to put a 20-month freeze on energy prices, the country’s ‘Big Six’ providers have since been touted as potential break-up candidates to stimulate competition and drive down customer bills.
These developments have pushed Centrica’s share price heavily to the downside, and the electricity play has shed almost a quarter from last autumn’s record high above 402p per share. But for many investors, particularly those who believe that current uncertainty is mere politicking ahead of next year’s general election, now could be a terrific time to stock up on Centrica.
Most attractively, Centrica’s price dive has seen its already-attractive income prospects receive a gargantuan shot in the arm. Although the firm is expected to experience a 14% earnings decline during 2014, the firm is still expected to lift the full-year dividend to 17.6p per share from 17p last year. And an anticipated 17% earnings bounceback in 2015 is expected to underpin a further payout hike, to 18.2p.
These predicted payments generate enormous yields of 5.8% and 6% correspondingly, comfortably usurping a forward average of 3.2% for the FTSE 100 and beating a respective readout of 4.6% for the complete gas, water and multiutilities sector.
Of course further clouds could be on the horizon for Centrica. The company said in May that intense competition is preventing it from lifting tariffs, while rising wholesale prices are also denting earnings forecasts. Undoubtedly the hostile political environment is also weighing heavily on the firm’s ability to hike tariffs to boost revenues.
And the energy giant took another blow to the solar plexus this month when Ofgem fined it £1m for mis-selling practices, the last thing the company needs as it bids to rebuild its battered reputation ahead of the election.
But many believe that the screaming rhetoric over rising energy bills is nothing new, and that the trading environment could become much easier for the likes of Centrica once next year’s political run-off concludes. For those willing to bet that current troubles are likely to evaporate, the company could prove to be a spectacular high-risk winner.