One of the most costly lessons I’ve learned in investing is that companies with problems often take much longer than expected to fix them. FTSE 100 utility group Centrica (LSE: CNA) is a good example.
Its share price has fallen by 66% since boss Iain Conn took charge at the start of 2015. Conn has so far failed to reverse the group’s falling customer numbers or deliver a sustained improvement in profitability.
A dividend cut seems ever more likely to me, and the shares are now trading at an 11-year low. Is this a stock to avoid, or should brave investors start buying?
Enough already?
Critics say Conn has run the group to maximise cash flow, slashing jobs and cutting spending without any clear strategy for the future. He’s also under fire for pocketing a 44% pay rise last year, lifting his earnings to £2.4m.
In fairness, I think he has made some progress. A focus on cash was needed to reduce net debt, which has fallen from £5.2bn to £2.7bn since he took charge. And as I’ve explained, performance did improve last year on some key measures.
However, there’s no doubt problems remain. According to the company, lower gas prices and the warmest February on record put pressure on profits during the first quarter. British Gas lost 234,000 customers during the period, mostly as a result of the energy price cap.
Outages at the Dungeness B and Hunterston B nuclear power stations — which Centrica part-owns but doesn’t operate — added to the firm’s woes.
One final pressure is the risk of nationalisation under a Labour government — something Conn can’t control.
Change could bring opportunity
As renewables become more important and coal power is phased out, I think utilities will be forced to change. But I don’t think major players like British Gas will become redundant.
In my view, we’re still likely to need utilities to handle the connection between millions of home energy users and the grid. Microgeneration — such as solar panels — will probably grow. But in Northern Europe I don’t see much chance of homes becoming self-sufficient, even with battery storage.
A second factor is that the power provided by renewables such as offshore wind is inconsistent. Other sources of electricity, such as gas and nuclear power are needed. Even if renewables expand, we will still need balancing power supplies and distribution infrastructure. These are areas where big utilities should excel, in my view.
The final point I’d make is Centrica and its peers have all suffered from a lack of long-term government policy on energy. Investing in assets with a working life measured in decades isn’t easy when politicians change the rules every few years.
What next?
Conn has promised to provide a full review of Centrica’s strategy with its half-year results in July. I expect this will include a dividend cut, but hopefully there will also be more positive news on growth in the group’s UK services business.
For long-term investors, I think the shares offer potential value. However, the group’s high debt levels and fragile profits mean this business carries some risk. I’m holding, but I won’t buy more until after July’s update.