Centrica feels the heat as profits suffer

SHARES in British Gas owner Centrica fell over 40 per cent last year, making it one of the worst performing stocks of 2017.

Continued customer losses and fears about a potentially damaging price cap are just two of the headwinds facing the group, and neither shows signs of easing.

Expectations ahead of Thursday’s full year results were therefore unsurprisingly low.

Group revenue rose 3 per cent to £28billion, however operating profits fell 17 per cent to £1.25billion as profits in the part of Centrica serving businesses collapsed. However, a profit warning in November meant this didn’t come as a surprise. More important was confirmation that management intend to hold the full year dividend steady at 12p per share out to 2020. There were also details of new costsaving plans. This more positive news helped the shares rise 7.5 per cent on the day of results, providing some muchneeded cheer to investors.

However, the group will clearly need to address its declining customer base. Last year it lost 1.7 million customers across its UK and US businesses, and while many of those were on low-margin bulk deals, the group can ill afford to make a habit of that kind of outflow. Centrica’s response will be two-fold. In the short-term, the group is finding ways to scale back, plugging the holes in its income statement to sustain the dividend.

With the yield at 8.5 per cent, the sustainability of the payout is of paramount importance to investors.

Offshore assets in Canada and the Caribbean have been sold, and Iain Conn, Centrica CEO, is confident the group can find another £500million per annum of savings to go with the £750million already achieved. This will involve job losses, some 4,000 sadly. Of course, dividends can’t be sustained by asset sales and cost cutting indefinitely. Longer-term, Centrica needs to find a way of retaining more customers, and attracting new ones.

The group is investing to improve its quality of service. Whether the medicine can cure the disease fast enough to prevent serious surgery where the dividend is concerned remains to be seen.