Although Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) pushed up its dividend over recent years, the integrated gas and electricity company’s share price made little overall progress.
Ten years ago, investors could buy the shares for 240p, which compares to today’s 324p, indicating snails-pace capital appreciation of just 35% over a decade for investors. Based on that past performance, I wonder whether Centrica has the form to deliver worthwhile capital-growth on any new investment made now.
Fluctuating profits
The main factor working against investor capital-growth seems to be the fluctuating nature of the firm’s profits. It’s not easy to make a living in the energy business as demand varies with the weather. The company reckons that the half-year results this time, which show year-on-year operating profit down 35%, suffered from mild weather in the UK and the Polar Vortex in North America. Unusually hot or cold weather often messes up cost budgeting, and such natural events are out of the director’s hands.
Weather’s not the only challenge. The firm’s chairman cites the political environment as a barrier to profitability too. As energy bills keep getting bigger for cash-strapped consumers it’s natural for the collective voice of protest to rise. Managing this backlash must add to costs. The chairman reckons the firm addresses the issue of trust through its quality of service and relationship with its customers, and by its interactions with politicians, regulators and the media, whilst stressing the importance of Centrica to the country’s energy security.
It’s a fine balancing act to pull off, and I think the firm’s record on profitability tells the story:
|
Year to December |
2009 |
2010 |
2011 |
2012 |
2013 |
|
Operating profit (£m) |
1,174 |
3,081 |
1,347 |
2,491 |
1,721 |
|
Net cash from operations (£m) |
2,647 |
2,428 |
2,337 |
2,820 |
2,940 |
Both profits and cash flow are up and down in the table, suggesting that trading is tough and volatile for Centrica.
Potential for growth
Despite slow progress, Centrica has always carried the odour of growth potential. The firm is more than just a utility company supplying gas and electricity to customers in the UK and the US. Around 50% of its business comes from upstream activities such as oil and gas exploration, production and storage activities.
There’s room for Centrica to grow its upstream business but such expansion carries no promise of certainty. Judging by the Centrica’s trading record I think better growth opportunities exist on the London market, particularly outside the FTSEÂ 100.