Energy company Centrica (LSE: CNA) has been on a tear lately. A reshaping of the business and positive trading trends have helped push the Centrica share price up by 55% over the past year.
Here, I look at whether it can keep gaining value – and what that means for my portfolio.
Positive momentum
A lot of investors have been focussing on the growth in energy prices over the past year. As a supplier, that could be good for profits at Centrica. However, the firm also has an energy trading division that can buy as well as sell gas. So it is not simply the case that any move up in energy prices must be good news for the firm.
However, I think the energy price is only one reason investors have started to warm to the British Gas owner. Its balance sheet has also improved dramatically. Centrica ended last year with a net cash pile of £680m, compared to net debt of almost £3bn just one year before.
Although that debt reduction was partly due to asset sales, I think it was a smart move for the company. The business is now more focussed and without a burdensome debt pile to service at a time of rising interest rates. I think that combination of factors could continue to propel the Centrica share price higher still.
Centrica share price prospects
Costly energy prices may continue for some time, which could lead to bumper profits. The healthy balance sheet might also help the company restore its dividend. I think that would improve investor confidence, potentially also helping to lift the shares.
But the shares would need to go up by around a quarter to hit £1. That sounds a lot. Yet the company has been performing well and further energy market turbulence could help its share price increase further. So I do think it is possible the shares may pass the £1 mark before the year is out.
However, things could turn out differently. As we have seen lately, energy prices can be highly volatile. They can suddenly go up — but they can also come down quickly and sometimes unexpectedly.
Meanwhile, the Centrica board has been in no hurry to restore the dividend. Doing so in coming months just as high gas bills land on millions of doorsteps could add political risks for the business. So despite its buoyant balance sheet, I suspect the dividend may not be restored soon.
My move
The ongoing dividend suspension highlights something I dislike about Centrica – its untapped potential. The business has long had lots of apparently positive features, yet somehow often manages to disappoint. Even after the past year’s rise, its share price remains far below what it was a few years ago.
I think management missed an opportunity to bring back the dividend with the final results, which shook my confidence in their judgment. I sold my shares. Although I think the price could still go higher, for now I do not plan to buy into the company again. I would rather put the money into shares of a company with management I rate more highly.