Over the past 12 months, the value of Centrica (LSE: CNA) shares has slumped by 30%, and over five years we’ve seen a 66% collapse in the share price.
From 2013 to 2018, earnings per share (EPS) has declined by 57%, and expectations suggest a further drop of 12% this year.
Still not cheap
With that earnings crunch, even those whopping share price falls have still left Centrica on a P/E of around 12 based on 2019 forecasts, and that’s not looking particularly low for a company that’s struggling with the energy price cap and with competition in the industry.
And if that’s not enough, some investors will be keeping well away from Centrica in the fear of the nationalisation that’s threatened under any potential Labour government led by Jeremy Corbyn.
With the share price now at its lowest price this century, do I see a bargain share worth buying? No, I don’t, as I’m really not happy with Centrica’s financial position. In February, with the shares trading at 120p (12% higher than today), I was especially unimpressed by Centrica’s dividend policy, which I described as nonsensical.
Dividends
Forecasts suggest a dividend of 10.5p per share this year, down a bit from last year’s 12p, but it would still yield a massive 9.2%. The problem? It wouldn’t be covered by earnings, just as last year’s wasn’t.
At the last year-end, at 31 December, Centrica’s net debt stood at £2,565m. The company decreed that as within its target range, but for the current year it’s expected to swell to between £3bn and £3.5bn. The adoption of IFRS 16 accounting is apparently part of that, but it’s still a big figure.
The company is still in the process of consolidating its assets to “maintain a strong balance sheet,” but I always thought you had to achieve a strong balance sheet first before you could maintain it. In my view, Centrica’s balance sheet right now is far from strong.
Cash management
I have little confidence in the dividend, and I reckon a cut would be a good thing. In fact, what concerns me is a question that always perplexes me about companies getting into earnings and cash flow squeezes. Why do they take so long to do something about it, and carry on paying big dividends as if everything is rosy?
The Centrica dividend is slated to decline modestly this year and next but I see that as too little, too late. In my view, the best approach for the long-term health of the company would have been to cut the dividend more deeply, by 2017 at the latest.
And I’d like to see companies, perhaps with the exception of those few with enough cash muscle to keep paying through temporary earnings downturns without any harm, to pledge to peg dividends to a minimum level of cover by earnings.
Needs a shakeup
I reckon I’m seeing years of complacency from Centrica, with the company expecting to just carry on carrying on without having to think too much about it.
I’m not saying it’s easy, with the choices basically coming down to retaining profit margins or retaining customers, and Centrica has been losing the latter in large numbers. But I think it needs to resize its expectations.
And I know the right answer for me as an investor — steer clear of Centrica shares.