Utility firms such as Centrica (LSE: CNA) won’t be enjoying all this mild weather we’ve been having. It’s bad for business: no one uses much gas or electricity, and that wreaks havoc on energy suppliers’ cash flow.
To tell you the truth, I’m a bit fed up with it myself. Cold seasons should be cold; so that we can all eat lots of comfort food and then wear baggy cloths to cover up the effects!
Tough trading
Centrica’s weather-related problems have been an issue for sometime. As long ago as July the chairman said that the first half of the year saw challenging market conditions, both due to the weather and reflecting the wider political environment. Continuing unseasonable conditions won’t be helping one bit. Maybe that’s why the share price slid from 345p in January to 298p today.
Yet the uncertainties in Centrica’s business model have weighed heavy for a long time. Ten years ago, we could pick the shares up for 220p. They’ve only advanced by 35% in a decade suggesting that, although dividends remained robust, inflation must surely have neutralised the total returns of those holding the shares. Reinvesting dividends might have helped but, overall, Centrica has been a relatively poor investment over the period unless there were significant special dividends or capital returns along the way.
However, I’m looking at the chart just as it has zigged. If we look at the last ten years, Centrica’s share price often zags, too, so picking up a few in the hope that 2015 may turn out to be a better year for the firm strikes me as a decent trading proposition. After all, trading stalwarts largely drove legendary investor Peter Lynch’s remarkable investment performance, and if it’s good enough for him…
Diverse operations
Centrica has upstream and downstream operations in roughly equal proportions, which makes it a bit different from some other utility firms. There’s also a good geographic spread of operations, with around 66% of Centrica’s revenue coming from the UK, 28% from North America and 6% from the rest of the world.
Downstream activities supply both gas and electricity, as British Gas in Britain and as Direct Energy in the US. This utility part of the business delivers steady cash flow to support Centrica’s dividend.
|
Year to December |
2009 |
2010 |
2011 |
2012 |
2013 |
|
Net cash from operations (£m) |
2,647 |
2,428 |
2,337 |
2,820 |
2,940 |
|
Dividend per share |
12.8p |
14.3p |
15.4p |
16.4p |
17p |
Then there’s the feint whiff of  upside potential wafting from upstream operations, which include 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.
What now?
Assuming that weather patterns revert to the mean over the long run, Centrica will probably keep lumbering on and keep paying its dividend. That said, an extended period of near sub-tropical winter conditions could easily see the dividend off and sink the share price.
Centrica’s forward dividend yield is running at around 6% for 2015, and the forward P/E rating runs at almost 13. City analysts following the firm expect earnings per share to decline 21% this year followed by a 12% rebound in 2015.
Despite Centrica’s chunky looking dividend payout and vague growth potential, I’m not a fan of the firm as an investment. If we are thinking of total investment returns, perhaps we should look elsewhere for companies with strong trading franchises that can really drive wealth creation if we buy the shares at sensible prices.