Can it get any worse for Centrica shareholders?

Dividend is under threat as stock hits 20-year low

WHEN the Government brought into force its energy price cap this year, preventing customers on so-called default tariffs from being charged extortionate amounts, few shed a tear for Centrica.

But investors in the British Gas owner have had a rocky ride since the concept of the cap began to be seriously considered by politicians.

The price cap sets a limit on the bills which can be charged to customers on a standard variable tariff, who haven’t chosen one of the cheaper fixed-rate deals.

It’s good news for Centrica’s 15.3m home energy customers, but less welcome to the 530,000 individual shareholders who own part of the company.

The investor army is even larger when you include those holding shares through a nominee account like Hargreaves Lansdown, or as part of a fund.

The price cap has battered oncereliable Centrica’s profitability. As

John Musk, an analyst at RBC Capital Markets, explains, for the past four years the firm has made a profit margin of around 7pc to 8pc. This year, he expects that to sink to around 3pc.

At the start of this month, the energy regulator Ofgem revised the price cap up by £117, allowing energy firms to charge a maximum of £1,254 per year. Investors may have been wondering whether that would give Centrica and its peers a little more breathing space. ‘Not really,’ says Musk. ‘It’s just a passthrough. The cap is going up because wholesale oil, gas and power prices on a trailing two-year basis are higher now than they were six months ago.’

For Centrica shareholders, this possibility may be hard to stomach when the shares are already languishing at their lowest since the late 1990s. Just over the last year, the share price has tumbled by more than 20pc to around 110p.

Once touted as a safe bet, with individuals encouraged to buy shares in British Gas (as it then was) when it was privatised and floated on the stock market in 1986, many will be wondering whether it is worth holding on to the stock. Up until recently, Centrica was still able to provide its shareholders with a reliable and relatively generous dividend.

Last year that dividend was set at 12p per share – but it may not hit that level again for some time.

‘I think it’s impossible for them to hold on to a 12p dividend,’ says Musk. ‘We believe it’s probably going to be near- enough halved when we come to the half-year results in July.’

Already this year warnings of outages at Centrica’s nuclear assets have knocked earnings per share, or how much profit Centrica is likely to make for every share.

This sum is drifting down to around 8p per share, and as Musk explains: ‘It’s pretty unsustainable to pay 12p of dividend out of 8p of earnings.’

Despite a more challenging political and regulatory environment, as well as the increased competition from a hoard of new energy suppliers boasting flashy mobile apps and stellar customer service, Centrica isn’t dead yet.

‘It seems likely that Centrica will be a survivor,’ says John Moore, senior investment manager at Brewin Dolphin, referencing their enormous customer base.

But, he emphasises, Centrica cannot sit on its laurels and rely on its history to keep it afloat. For a start it could sell its nonessential assets – a process it has dipped into, but which should be pursued. Whether Centrica’s management team can affect the change needed, or whether boss Iain Conn will find himself in need of a new job, will be a decision left to shareholders and new chairman Charles Berry.

Moore adds: ‘It’s possible to turn around a business even in a low margin environment, but it needs energy, enthusiasm and renewed vigour and I’m not sure that’s really there at this point in time.’

Conn hasn’t exactly endeared himself to investors recently. Just this week he nabbed a 44pc pay rise, days after another profit warning, taking home £2.4m at a time when shareholder returns have been lacklustre at best.

‘Like most people, I found Conn’s pay rise very strange. “Indefensible” would be the only description of it,’ says Moore.

For long- suffering shareholders who bought into Centrica wanting a reliable, low-risk investment, the company is certainly not what it was. Compared to other FTsE 100 firms, Moore says, Centrica is ‘volatile and rocky’.

But now is probably not the time to sell shares either. Musk adds: ‘It’s difficult to see the share price drifting too much lower.’

How long it will take them to rise depends on when – and if – Centrica can convince the market it has a sustainable plan to survive in an ever-toughening environment.