Shares in Centrica (LSE: CNA) and Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) slipped modestly lower when markets opened this morning, thanks to a both companies issuing a new round of bad news.
Centrica profit warning
Centrica told investors this morning that full-year adjusted earnings per share are expected to be in the range 19-20p, down from previous guidance of 21-22p. Although that doesn’t sound like a big drop, it’s actually a 10% cut to the guidance Centrica provided with its interim results in July.
UK weather seems to be the main problem: the mild winter and long summer means that gas sales between January and October were 21% lower than during the same period last year. Meanwhile in the US, the Polar Vortex caused disruption and extra costs for Centrica’s US business.
However, there was some good news for investors: the dividend is safe. Centrica confirmed this morning that it still plans to increase its dividend by more than the rate of inflation this year.
Is Centrica a buy?
Using the new guidance, Centrica shares trade on a 2014 forecast P/E of around 15 and offer a prospective yield of 6.0%.
Although that yield is tempting, I believe that this valuation looks high enough already, and believe there is a significant risk of a dividend cut next year: I rate Centrica as a hold.
RBS fined again!
RBS announced this morning that it has agreed to pay a £56m fine to UK banking regulators in relation to the bank’s disastrous June 2012 IT outage, which left customers without access to their money.
In addition to this, RBS has already paid £70.3m in compensation to its UK customers.
That’s a total of £126m, making it an expensive IT failure — but Simon McNamara, RBS chief administrative officer, says that the bank will have invested an extra £750m on improving the security and reliability of its IT systems by the end of 2015.
Do IT upgrades make RBS a buy?
Given this significant investment, I’m willing to give RBS the benefit of the doubt on its IT systems, but I remain fairly neutral from an investment perspective.
With earnings per share forecast to fall by 10% next year and no sign of a dividend, RBS’s 2015 forecast P/E of 11 and 10% discount to tangible book value look about right to me, so the bank’s shares remain a hold, in my view.