Centrica (LSE: CNA), the owner of the British Gas and Scottish Gas brands in the UK and supplier of electricity and gas in the USA, has seen its share price fall 12% since the start of 2014, to 308p today.
Part of that is due to increased costs, the impossibility of raising prices right now, and an actual fall in the consumption of energy in the UK. The result is a forecast 20% drop in earnings per share (EPS) for the year to December, although the strength of sterling will be playing some part in lowering the value of overseas earnings.
Tasty dividends
That would put the shares on a forward P/E of 14.5, which is only a tiny bit above the FTSE 100‘s long-term average of 14. But when we consider that Centrica is likely to be paying a dividend yielding a very beefy 5.7%, it’s starting to look attractive.
And with a 12% recovery in EPS forecast for next year to drop the P/E to 13, coupled with a predicted rise in the dividend to 5.9%, it’s almost screaming out to be bought.
The big problem, of course, is the upcoming UK general election, and the major parties have their knives out and ready to attack the nasty greedy energy companies for daring to charge so much. Labour leader Ed Miliband has already promised a 20-month freeze in energy prices should he come to power, and that is looking increasingly likely.
So what should a poor investor, who simply wants to secure a comfortable old age, do?
Long term
My thought is to ignore such short-term things and concentrate on the longer term — and energy companies will still be around, still selling their gas and electricity, and still handing out those handsome dividends long after Ed and his foes have put their sabres away and faded into political memory.
Over the past 10 years, Centrica shares have gained a modest 21%, but they have been paying those steady dividends — and that’s really what you need in your retirement. In fact, the dividends would have wiped the floor with a bank savings account and you could see that 20% capital gain as a bonus.
And if you don’t need to take the income yet, a 5% annual yield reinvested to compound over 10 years, would have gained you more than 60% in dividends alone!
Buying opportunity?
I think that kind of long-term safety makes up for the short-term risk, and I see this year’s price fall as a possible buying opportunity.