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Centrica dividend still verging on "too good to be true"

“Centrica has a plan to get back on track but the journey is likely to be very bumpy,” said one analyst

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Centrica PLC (LON:CNA) snipped its dividend in half last year and after today's big loss and a grim outlook for cash flow in 2020, the prospects for material recovery of the payout say analysts.

The FTSE 100-listed energy supplier posted a loss before tax of £1.1bn for 2019 and cut its dividend 58% to 5p as it was hit by £1.75bn of charges and a £493mln cash contribution to its pension fund.  

READ: Centrica posts big loss after oil and gas write-offs

Charges included Centrica writing down its oil and gas exploration and production (E&P) assets by £476mln its stake in UK nuclear power plants by £372mln due to lower commodity prices.

The company wants to sell these assets, ideally by the end of 2020, to become a fully consumer-facing business. 

“Centrica is a turnaround story still in its infancy and the company’s full results show there is a long way to go before the utility company is in a better shape for the next phase of its life,” said Russ Mould at AJ Bell

While the results showed a lessening in the amount of customer churn that has plagued the group in recent years, as well as more positive customer feedback, Mould said the issues with the oil, gas and nuclear operations have clouded things somewhat and is likely to mean Centrica may have to sell them for a lower price than the market might have previously expected.

In the near term, he said investors will be inclined to give the company the benefit of the doubt after 2019 saw somewhat of a “perfect storm” of events, but he still has qualms about the lack of cover for the dividend.

Adjusted cash flow fell 18% to £1.8bn last year but free cash flow fell 71% to £141mln, which Mould noted would not even be able to cover the new dividend, which is likely to cost around £290mln in 2020.

With continued weakness in the contribution from E&P, the outlook for 2020 for cashflow and earnings “looks very weak”, said analysts at JP Morgan Cazenove, with cash expected to come in around £180m lower than its estimate.

“Given we previously considered 2019 to be a ‘one-off’ weak year and there is a beneficial reduction in D&A, this is very bearish indeed on an underlying basis,” they added.

UBS agreed that the broader outlook from the company suggests that in 2020 “growth in the customer facing business and contraction in the asset businesses could offset each other, implying limited room for earnings growth in 2020”, though UBS forecasts the dividend will be nudged up to 5.3p for 2020 and to 5.5p the year after.

But Mould said Centrica’s free cash flow cover for a dividend of 5p payment would have only exceeded 2.0 times or more on just three occasions in the past nine years, “so it would be unwise to take too much for granted.

“A 5p dividend on a 70p share price equates to a yield of more than 7%, which is bordering back on ‘too good to be true’ territory in a world where the Bank of England base rate is 0.75% and investors are demanding such a high yield (and only paying a low share price) to compensate themselves for the risks associated with owning the shares.”

 

Quick facts: Centrica PLC

Price: 76.78 GBX

LSE:CNA
Market: LSE
Market Cap: £4.47 billion
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