It is still 21% higher than it was a year ago. But the buoyant share price of the summer now seems like a thing of the past. Why is that – and does it offer a buying opportunity for my portfolio?

Positive business momentum

Whatever has been going on with the share price, it is worth recognising that the Centrica business has been looking in better shape recently than it did for a long time.

The firm has streamlined through asset sales, giving it more strategic focus as well as a far healthier balance sheet. The company ended its first half with net cash of over £300m, reflecting a very impressive £4.2bn of debt reduction since the middle of 2019.

Despite long-term decline in its customer base, the firm still has a very strong foothold in the UK gas market. It ended H1 with almost 8m residential and small business customers. That was actually a modest increase on the customer base of a year previously, although still far below the glory days of a few years ago.

Valuation questions

Given all that, why is the Centrica share price losing ground? At face value, the debt-free company’s price-to-earnings ratio of under eight looks cheap.

But I think that reflects several concerns investors like me have about the prospects for Centrica. Gas prices are a double-edged sword for the company. Even when they are high, there is a political risk that perceived profiteering could lead to regulatory intervention such as price caps. As Centrica has a trading division, unexpected moves in gas prices could also eat into profits.

On top of that, it has a track record of disappointing investors. The Centrica share price is less than half of what it was five years ago. The interim dividend was restored yet at a level less than a third of what it had been four years previously.

If the business can maintain its recent profitability, I think the current share price could come to seem like good value in future. But the company has disappointed a lot of investors over many years. If it makes more missteps in future — such as handling industrial action in a way that damages the business — the current share price may not turn out to be the bargain for my portfolio I would like it to be.

The share price doesn’t tempt me

That is why I have no plans to add the shares to my portfolio. In fact, I sold my position earlier this year when the price was higher than it is now, as I was concerned about where it might go.

I still think it has the makings of a strong business thanks to its customer base and strong brands. But, for now at least, the risks I see stop me from investing.

So let’s take a closer look at this electric services company and see whether now is a good time to add this stock to my portfolio.

Three-year trend

If I had added Centrica stock to my portfolio three years ago, I’d only be up 3.7%. So my £300 would now be worth around £311. That’s clearly not a good return for a three-year investment. In fact, it wouldn’t even pay for two drinks at my local.

However, the share price has been anything but flat over the past three years. When the pandemic hit, the share price collapsed from around 90p to as low as 35p. Today, the share price is hovering around 70p after a stellar year, driven by rising energy prices.

Improving fortunes

In July, Centrica said it had delivered a “strong” operational performance in the six months ended 30 June. Adjusted underlying earnings skyrocketed 143% to £1.66bn and adjusted operating profits surged 412% to £1.34bn.

Meanwhile, adjusted earnings per share shot up to 11p from 1.7p at the same time a year earlier. But on a statutory basis, Centrica swung from an operating profit of £1.0bn in 2021 to a loss of £1.09bn a year later. this was due to a £1.9bn loss on net re-measurements after taxation.

Centrica said its stellar performance reflected improved trading environments across much of the group’s segments. The company’s operations in the nuclear and oil & gas businesses were highlighted as a particular area of strength.

Chief executive Chris O’Shea added that the group had made “significant progress” in de-risking the business amid a challenging environment for customers and other energy companies — many of which went out of business.

Better investment opportunities available

Shares in Centrica fell in early September on reports the UK’s largest energy supplier was seeking additional credit to meet rising collateral demands. European electricity providers are required to post collateral with trading exchanges, but volatile energy markets have seen the amounts they are required to post soar as wholesale prices surge.

Moreover, I think there are better places to put my money right now, primarily because of the risks and challenges of the energy market. Amid shortages and rising gas prices, there are reports that we may even experience power outages this winter — although I think the term “load sharing“, as its called in South Africa, might be better for the government’s optics.

The windfall taxes might have been taken off the table, but this government has U-turned before. While Centrica was recently found to be the only UK energy provider without “significant issues”, Ofgem have warned that customers may struggle to pay rising bills this winter.

Because of these challenges and uncertainties, I’m not investing in Centrica right now.

At current prices of 83.5p, the FTSE 100 business now carries a dividend yield of 3.7% for 2022, based on current dividend forecasts.

These readings fall marginally below the FTSE index average of 3.9%. But the dividend yield rises to a superior 4.4% for 2023.

Centrica’s yields are healthy rather than amazing. But could the energy giant be a great buy for investors seeking dividend growth? Here, I’ll drill down into its dividend forecast for the next couple of years and explain why I’d buy — or wouldn’t buy — Centrica shares for my portfolio.

Dividends to return?

It slashed 2019’s annual payout to 1.5p per share from 12p as the government’s energy price cap and huge restructuring causes monumental losses. The onset of Covid-19 also dented the dividend and prompted Centrica to pay zero dividends in 2020 and 2021 too.

But Centrica’s given income investors something to cheer more recently as it paid a 1p per share dividend for the first half of 2022. City analysts are expecting a full-year payout of 3.1p.

And things get even better for 2023. Next year, brokers expect the total dividend to jump 19% year on year to 3.7p per share.

Robust forecasts

It seems to me as if Centrica has a great chance of hitting these estimates too. The first port of call is to see how many times over projected dividends are covered by anticipated earnings. A reading of 2 times and above is the target for investors to be confident. Encouragingly, its dividend cover sits above an impressive 5 times through to the end of 2023.

Centrica also now has a robust balance sheet to help it pay decent dividends over the short-to-medium term. It had net cash of £316m on its books as of June. A year earlier it had debts of £93m.

Should I buy Centrica shares?

Profits and cash flows have rocketed at the firm, thanks to sky-high energy prices. In fact, adjusted operating profit jumped fivefold between January and June to £1.3bn as the Ukraine conflict pumped up oil and gas values.

However, Centrica still poses some significant risks to investors. This is reflected in the company’s rock-bottom price-to-earnings (P/E) ratio.

The rising strain on household budgets is prompting people to shop around for better energy deals, damaging margins at British Gas and pulling customer numbers 5% lower in the first half.

Then there’s the uncertain long-term picture for Centrica’s fossil fuel exploration and production business. The pressure for nations to accelerate their net zero ambitions is growing and demand for energy from renewable sources is booming.

As someone who buys shares for the long haul I believe it still carries too much risk. As a result, I’ll be looking to buy other dividend-paying UK shares today.

The surge in its share price is primarily because of the energy crisis in the UK and Europe. Rising fuel costs are causing strong inflation in the region. Germany was in the news earlier this week when inflation hit its highest level in almost 50 years. Nine other countries in the region have registered double-digit annual inflation, thanks to a big spike in August. 

A recent report from the International Energy Agency showed that coal prices will remain close to all-time highs for at least the next six months. As a result, energy companies could see a further surge in earnings in 2023. And I think investors have rightly been clamouring to buy renewable energy shares in the UK while they are still cheap.

Centrica share price has strong momentum

Centrica is one of the largest suppliers of electricity and natural gas to consumers in the UK and Ireland. The company operates British Gas, which provides gas to over 9m homes across the country. 

Just this week, UK wholesale gas price tumbled by more than 20% thanks to Centrica’s efforts to reopen UK’s biggest gas storage facility located under the North Sea. However, despite this drop, prices still remain 12 times higher than 2021 levels.

While many investors will look at this as a step to reduce gas prices, I think this still benefits the firm. Gas storage facilities will now maintain reserves at 80% capacity. This is to avoid any abrupt supply disruptions when Russia further reduces gas exports before the winter. This means that British Gas‘ reserves could quickly jump in value again if reserves drop in early 2023.

This is the main reason why I think Centrica shares look cheap right now despite the 143% rise since 2020’s crash. At 77.8p, its share price is currently 20% lower than 2022’s highs of 93p. And I think the company can post new post-pandemic highs if current demand continues in 2023. 

Concerns and verdict

However, this is firmly dependent on how the UK government handles the current energy crisis. Relief measures, including cash payments to households, have been deployed to reduce the impact on the public. European leaders are turning to other major exporters like the Middle East and the US. However, given the demand, this could become expensive.

The price of crude oil is a big factor that Europe and UK will have to address. Companies, including Centrica, have an established renewable energy network. But if they are forced to increase green energy capacity, it could put pressure on operations and cash reserves. This could put off investors as profit margins and revenue will be affected. 

While this energy crisis is concerning, it also presents an opportunity. Centrica holds prominent green energy assets and is a market leader in the UK. The gas giant could play a substantial role in providing the infrastructure to help the UK transition.

I am bullish on the company and could be tempted to invest in Centrica shares if there is a significant correction in the coming months.  

Boring is better

In times of market madness, the most boring stocks often outperform. Centrica has certainly proved that. The company is simple to understand – it supplies energy services to homes and businesses in the UK (mainly through British Gas) and Ireland (through Bord Gais Energy). This accounts for the majority of the company’s revenue.

On top of this, the company owns Hive, a technology solutions business that sells energy appliances such as electric vehicle charging ports. Centrica is also involved in renewable energy projects (solar farms). Both of these segments account for a smaller portion of total revenue.

Over the past year, there has been severe disruption in the energy supply industry. Several companies have filed for bankruptcy as oil and gas prices soar, squeezing their profit margins. Centrica’s ability to survive through this period shows its resilience, which should benefit the company in the medium term.

The company has benefitted from this market weakness, taking on the customers of bankrupt energy supplier People’s Energy and acquiring Nabuh in recent years. This has increased its market share in the UK. Centrica is also actively disposing of exploration assets to pay down debt and strengthen its balance sheet.

Cash is king

Analysts have predicted the company will remain cash flow positive over the next two years. It currently has a 12-month forward free cash flow yield of 14%. Valued at a five times price-to-earnings ratio, the company is at its lowest valuation ever — even cheaper than 2008, at the peak of the great financial crisis.

One significant risk to the business is the recent windfall taxes mentioned by many politicians, as this would reduce net profits for Centrica. However, with several companies filing for bankruptcy in the energy services industry, I believe a windfall tax would be counterproductive. Further bankruptcies could lead to monopoly status for the few survivors (Centrica is likely to be one of them), creating further price pressure as the survivors control the market.

Overall, Centrica operates in a staple industry, is gaining market share, and improving its balance sheet. It’s currently priced at a very low valuation, meaning any positive news is likely to boost the share price and is a great addition to my portfolio for the uncertainty that lies ahead.

But first, why are renewable energy shares witnessing historic levels of interest right now? I think the COP 26 summit last year triggered the perfect storm for a transition to cleaner energy. While governments increased focus on green alternatives, crude oil prices rose after Russia’s invasion of Ukraine. This added fuel to the green energy lobby and countries are now scrambling to secure sustainable alternatives to meet the power demand.

With money pouring into Europe’s thriving energy sector, I think this is the perfect time to invest.

FTSE 100 shares I’d buy to capitalise

The first company on my list is SSE (LSE:SSE). The FTSE 100 giant has the largest renewable electricity portfolio in the UK and Ireland. It specialises in onshore and offshore wind as well as hydropower. The company sells and distributes its energy to UK’s power grid.

In the financial year (FY) 2021, SSE generated £6.83bn in revenue and a total income of £2.28bn. These figures jumped significantly in FY 2022 when the company generated a revenue of £8.61bn and recorded an income of £3bn. The 33% jump in income comes primarily from its renewables wing.

Thanks to this strong showing, the FTSE 100 share has gone up 15.4% in the last six months. And despite this jump, it is still trading at a price-to-earnings ratio of 7.7 times. SSE shares also come with a healthy 4.6% yield making it really cheap right now

The other company on my watchlist is Centrica (LSE:CNA), a power transmission and delivery company with 11.7 gigawatts (GW) of renewable power under management.

Centrica operates British Gas, which powers millions of homes in the country. Centrica has been adding services like installing EV chargers to help consumers hit net-zero emissions as well. The company also owns a 20% stake in UK’s nuclear energy bank which is considered one of the cleanest sources of energy today.

The FTSE 100 share saw its dividend reinstated last month after the company saw revenue jump a whopping 2,851.22% in 2021 to £1.21bn. Although this is in comparison to a terrible 2020, the bounce back is significant. The energy giant also presented a stronger balance sheet, repaying the £93m debt from 2021.

Concerns and verdict

While both companies look financially strong right now, it is worth noting that energy prices play a major role here. When energy prices stabilise, profits could trend back towards pre-pandemic levels. This will slow down the investor interest in these two FTSE 100 shares.

Right now, both companies have a strong cash flow. But as we move closer to UK’s net zero ambitions, R&D budgets and asset purchases will increase, which could affect future results.

However, given the size, reach, and finances of these two companies, I think they are the best FTSE 100 energy shares for my portfolio right now. Depending on share price performance, I may be tempted to make a £1,000 investment in both in the coming months.

Let’s take a high-level tour of the complex world of valuation, uncovering some of the more promising value investment opportunities available.

What are undervalued stocks?

Undervalued stocks are businesses whose shares are trading below their underlying intrinsic value. With mood and momentum being the primary driving force behind stock prices in the short term, discrepancies between price and value occur constantly. And being able to identify such opportunities can be a highly lucrative endeavour.

These terms, “price” and “value” are often used synonymously in everyday life. But in the realm of finance, there is a stark difference between the two.

To quote famous investor Warren Buffett, “Price is what you pay. Value is what you get”. Buffett is probably one of the most successful value investors alive today. He made his multi-billion-dollar fortune by identifying strong businesses whose share prices were trading below the true worth of the underlying company and then investing in these undervalued stocks.

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Top undervalued shares in the UK 

Here are some of the top undervalued stocks on the London Stock Exchange.

Standard Chartered

Banking stocks typically outperform the market during times of higher inflation thanks to the subsequent boosts in interest rates, expanding lending margins. For many UK investors, Lloyds is often the go-to bank investment idea. However, Standard Chartered seems to be making bigger waves.

Management recently announced its ambitious goal of delivering an annual return on tangible equity (RoTE) of 10%. Given Standard Chartered’s track record of over-promising and under-delivering, it’s not surprising that many remain sceptical, resulting in a seemingly low valuation.

Yet looking at its 2022 first-quarter results, management so far seems to be on target. Its cost-to-income ratio has fallen to 62.1% from 74.3%, while RoTE reached 11.1%. Whether these figures can be maintained moving forward has yet to be seen. But so far, the group’s new strategy seems to be paying off.

Imperial Brands

Imperial Brands is one of the UK’s largest tobacco companies, generating most of its revenue from selling cigarettes. However, in recent years management has begun switching up its strategy by bringing healthier products onto the market, such as heated tobacco, oral nicotine, and vaping devices.

The stock currently trades at a cheap price-to-earnings ratio of 8.6. But this is nothing new. Like most tobacco companies, the business has always looked undervalued. Why? Because some investors aren’t fond of investing in a company whose products are known to cause severe long-term harm. But consequently, the group yields a pretty massive dividend that continues to return significant capital to shareholders each year.

Centrica

Centrica is a leading energy and utilities service provider in the UK. Beyond supplying gas and electricity, the group offers a collection of plumbing, drainage, and heating services through its numerous subsidiaries, including British Gas, Dyno, and PH Jones.

With electricity prices rising, the group’s bottom line has started moving in the right direction. And with a long track record of underachieving, it seems investors haven’t been entirely eager to jump on board. Consequently, shares currently trade at a relatively low valuation despite double-digit growth.

It’s possible that the recent jump in profitability is only short term. However, for the time being the stock is trading well below analyst forecasts. 

easyJet

Travel stocks have understandably been pulverised by Covid-19. With travel restrictions emerging worldwide, companies like easyJet have been limping on since 2020. Today the situation has drastically improved, though there remains a long road ahead before a full recovery.

Like many other airline stocks, there remains quite a lot of uncertainty surrounding easyJet. Yet despite this, the group seems to be in a stronger position than most. Its net debt has been steadily falling as it accumulates cash and equivalents on its balance sheet. Meanwhile, passenger capacity in the third quarter of 2022 is expected to reach 90% of pre-pandemic levels, with a near-complete recovery by the end of the year. 

The group obviously still has to contend with an increased debt load in a higher interest rate environment. But with fuel costs largely hedged to absorb the impact of rising oil prices, the group looks capable of making a full recovery in the long term. And that could mean its currently depressed stock price is undervalued versus the group’s future potential.

Redrow

After the pandemic decimated supply chains, homebuilders struggled to source necessary materials to keep up with surging demand. Redrow was no exception, with the stock taking a pretty significant hit as a consequence. 

Today, shares are still trading below pre-pandemic levels. Yet that’s despite the latest interim results showing superior revenues, profits, and a record order book. With interest rates rising, affordability for new homes is starting to suffer, which undoubtedly affects the group’s ability to sell its properties.

But in the long run, demand for housing isn’t going anywhere. And with the share price currently trading around six times earnings, this stock looks undervalued.

How to find undervalued stocks

There are two common methods to determine value:

1.     Relative Valuation (Multiples)

Starting with the easiest of the two, the relative valuation method doesn’t actually try to pinpoint the value of a company. Instead, it compares it with other businesses operating in the same or similar industry to see at what price point the shares are trading relative to another stock.

This is where financial metrics such as the price-to-earnings and price-to-sales ratio steps in. Stocks trading at a P/E or P/S ratio below the industry average are considered undervalued. Similarly, those trading above the average are considered overvalued.

2.     Intrinsic Valuation (Discounted Cash Flow Models)

The problem with the relative valuation method is that it makes many broad assumptions. Every business is unique in some way, which can skew results when compared with other companies, even if they operate in the same space. It’s entirely possible for a stock to trade above its industry average and still be undervalued.

This is where intrinsic valuation comes in. Unlike the relative, this method attempts to estimate the underlying value of a company based on the present value of its future cash flows using something called a Discounted Cash Flow model (DCF).

DCFs are a bit of a rabbit hole. But in oversimplified terms, an analyst forecasts the revenue stream for the next 5-10 years along with profitability to calculate the group’s future cash flows. These cash flows are then discounted back to present-day value at a rate reflecting the risk level associated with the stock. 

Calculating a sensible discount rate in and of itself can be a challenge. A typical go-to figure is 10%, but this can often be too little or too much, depending on the company. 

Once cash flows have been translated into present-day value, it’s then converted into equity value, which is the equivalent of market capitalisation. This can then be compared to the current share price to determine whether a stock is undervalued or not.

Needless to say, intrinsic valuation is far more time-consuming and challenging than relative valuation. However, it’s also more reliable, providing the analyst can produce accurate and reasonable forecasts – something that can be challenging to achieve.

Finding undervalued stocks in international markets

The core principles in identifying undervalued stocks and shares in international markets remain pretty much the same. However, there are some key differences to be aware of.

Depending on the location, the difficulty of accessing additional capital, either through debt or equity, can vary wildly.

If taking a relative valuation approach, performing a multiples comparison against other related companies operating in the same country is important.

If taking an intrinsic valuation approach, the discount rate needs to be adjusted to reflect both the difficulty of accessing capital and the risks of operating in certain countries. 

For example, accessing capital as a business in the US is far easier than in Brazil. But there is also the factor of the operating environment to consider. An American oil company might have easy access to funds, but if drilling is actually done in a more politically unstable region, the risk and impact of potential disruption need to be reflected in the discount rate.

Are undervalued stocks right for you?

Charlie Munger once said all investors are value investors. And in many respects, he’s absolutely right. After all, we’re all trying to pay a low price today to eventually sell at a higher price in the future. However, being a value investor requires a lot of knowledge and, more importantly, patience.

Undervalued stocks and shares can continue trading below their true value for months or even years. And it’s easy to lose faith in your original valuation model. After all, there is always the possibility that you were wrong. That’s why this strategy is not suitable for everyone. But for those who dare to go against the crowd and arm themselves with detailed analysis updated as new information comes to light, achieving long-term, market-beating investment returns becomes far more achievable.

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So, just how much could I have made if I’d bought last year? And is it too late to get involved?

Back in the black

Centrica shares have been in demand thanks to stellar trading in the company’s nuclear and oil & gas businesses. The huge rise in energy prices, boosted by fears over the invasion of Ukraine, pushed adjusted operating profit for the first six months of 2022 to £1.34bn. Last year, it was just £262m.

One of the biggest positives for me, however, has been the improvement in Centrica’s balance sheet. Having offloaded some of its non-core assets, net cash was £361m at the end of the first half. That’s far more preferable to the huge net debt pile it once carried.

Dividends return

Another big deal for investors has been the reinstatement of the dividend. A 2022 interim payout of 1p per share was recently declared.

Analysts currently have the company returning a total of 3.27p for the current year. Based on the share price as I’m typing, that would be a yield of 3.9%.

Dividends can’t be guaranteed, of course. I could also likely get more income from other stocks.

Even so, the reintroduction of cash returns tends to be indicative of a company in a better state than it once was.

Missed gains

By the close of play yesterday, Centrica shares had climbed 12% since the beginning of 2022. In 12 months, they’re up 68% in value. Put another way, a £10,000 investment would now be worth £16,800. Wow!

For someone trying to build his wealth, these missed gains are sobering.

Still cheap

Am I too late to the party though? Based purely on the valuation, Centrica could still make me money.

Despite the aforementioned purple patch, the shares change hands at a price-to-earnings (P/E) ratio of seven. That could prove great value if business in the second half is as good as the first, as management expects it will be.

Long-term loser

But I need to take a step back. Centrica shares are still massively down on five years ago. That’s a far better time period from which to judge an investment.

As a patient Fool, this serves as a reminder to not just blindly buy what’s flavour of the month (or year).

Yes, the £5bn cap’s progress may continue for now. But calls for a windfall tax on profits are only likely to get louder as bills go up again in the months ahead. And British Gas — the supply business — is struggling to pass on price increases in full to customers.

On a longer timeline, Centrica’s need to adapt to the clean energy transition will also be expensive and require ongoing investment. This could eventually hold the share price back.

Better opportunities

The best time to buy a stock is often when the chips are down. And there’s no shortage of high(er)-quality companies whose share prices are struggling for me to buy right now.

Those are the stocks I’ll be choosing. Centrica shares still aren’t for me.

The cost of living crisis has ramped up electricity bills. This has led to investors diving into this energy stock as revenues inevitably increase. But let’s take a look at why I would still add this energy stock to my portfolio at 87p.

Energising finances

Energy bills have been rising steadily over the last decade. But the current cost of living crisis has seen the price of energy consumption skyrocketing. This has been excellent news for Centrica. 

Net cash turned around from a debt of £93m in 2021 to a positive £316m this half-year. Also, gross revenues from Centrica’s energy trading increased from £8.7m to £15.8m. This demonstrates excellent managerial strategy, I feel. However, I’m concerned that the company may overdo its investment in the energy market. Energy prices may become increasingly turbulent and further investment means it would have a large financial, as well as operational, exposure to this volatility.

The company also announced a dividend of 1p per share. This closes the stock’s two-year gap in dividend payments. With the financial instability of the pandemic now fading away, I believe that Centrica can continue its dividends for the foreseeable future.

The share price has slowly crept up from 74p since January. Now, in its half-year report, Centrica has shown a huge turn around in debt, revenue and dividends. This leads me to believe the share price could be set to climb even higher.

Managing expansion

It’s clear that the energy stock is in a momentous position. With accelerating financials, and dividends reinstated, the share price seems to be headed upwards. But this does raise one question — how will the company drive this momentum forward?

Many UK energy companies ceased trading over the last year (just over half). This led to Centrica taking on 0.55m new customers in 2021 and 0.15m in 2022. This is great news for revenues. The creation of 500 customer service roles and 1,000 engineering apprenticeships suggests management is responding well to this expansion.

However, the cost per customer increased £3 to a total £96 in the same period. Also, the company stated that customers have switched to lower-priced products as a result of the cost of living crisis. This has led to cash flow from operations decreasing from £558m to £165m. 

Yet Centrica’s £800m sale of Norwegian E&P business to Sval Energi and Equinor demonstrates a healthy operational reduction. Management aims to minimise portfolio risk and focus on UK interests. With soaring profits back home, I think this is a well-executed strategy.

Overall, Centrica has regained financial strength — and finally got its dividends back on track. Management has also adapted quickly to its UK expansion through a larger workforce and selling of foreign assets. This leads me to believe the share price is set to climb even further and I will be looking to add Centrica shares to my portfolio.

At first glance, that looks like an incredible valuation. If second-half profits are as strong, the shares are trading on a prospective price-to-earnings ratio of less than three. Is this a bargain I should buy to help fund my retirement with its bumper profits paid out as dividends?

Some luck, some strategy

Energy prices have been booming. As an energy supplier and owner of brands such as British Gas, Centrica can profit handsomely from increasing energy prices. Indeed, that helps to explain much of the strong performance. The company noted that it had seen “strong Upstream volumes against a backdrop of higher commodity prices”.

The company also has a trading division, so higher energy prices can be a double-edged sword, depending on what trades it makes. Indeed, the potential for trading losses are one of the risks I continue to see for Centrica shares. But for this period, the business said that increased commodity volatility was “handled well” by the trading division.

But it’s not just that Centrica happened to be in the right place at the right time. In the past several years it has slimmed down, cleaned up its balance sheet and sharpened its strategic focus. That is increasingly looking like a good move for which management deserves credit.

Where next for Centrica profits?

What happens next? In short, nobody knows.

For now at least, energy prices remain very strong. They may even increase from here, boosting Centrica profits further. At some point they will turn downwards again. That could be next week – but it might also not happen for years. Meanwhile, high prices help support Centrica profits.

Meanwhile, I expect structural demand for gas in the UK to decline in coming years. That poses a big challenge for Centrica. Higher prices can help offset a fall in customer numbers for some time, but not forever. In the first half, customer numbers actually increased slightly. But they remain far below where they were a few years ago and the long-term trend is downwards.

High profits at a time of sensitivity about fuel prices also give Centrica a headache by adding political risk. If it looks like profiteering (and perhaps even if it does not), the government may cap prices or impose taxes in a way that cuts profits.

I do not regret selling

I sold my Centrica shares this year because I dislike the political risks the company faces and the long-term demand outlook. I also felt the company’s enthusiasm for restarting dividends seemed weak.

The interim dividend was finally restored yesterday, albeit at just 1p per share. Given how much cash Centrica is generating with a debt-free balance sheet, I think it could afford a much bigger payout. But that is politically sensitive.

For now, I think the profit outlook for the firm remains strong. But I would prefer to power my retirement with dividends from a business that is set to see growing demand and where bumper earnings are less of a political football. I have no plans to buy the shares again despite surging Centrica profits.