Centrica - the first cut is the hardest

Centrica: A new Chief Executive, Iain Conn, arrived earlier this year. So, in the time honoured tradition of kitchen sinking, the previously high profile dividend growth policy has gone for a ‘Burton’. In November, I wrote that I wasn’t that taken by Centrica at 294p, but at that stage the company was at least maintaining its target of real dividend growth. At the interim stage the dividend was ahead 3.7%, so whilst not wildly exciting for dividend growth hunters, it seemed OK. Now the finals to 31^st December have been announced and the total dividend is 13.5p, down just over 20% from the 17.0p paid last year. Having paid 5.1p at the interim, this final of 8.4p is just over 30% down on last year. For next year the full 30% cut will be implemented meaning a dividend around 11.9p.

So the white flag has been waved. The group is talking about ‘challenging conditions’ including adverse weather conditions (too mild in Blighty and a polar vortex in the US), and falling oil and gas prices. This has resulted in adjusted operating being down 35%, and eps down 28% at 19.2p. This just covers the new dividend, but net debt at £5.2bn is about 3x EBITDA. There has also been a £1.4bn impairment charge on various assets. These all seem to be signs of a company struggling to make progress for shareholders.

Looking forward energy companies in the UK are becoming a prime public enemy as politicians see them as election cannon fodder and the company takes stick for, supposedly, fleecing customers whenever possible. This is not a helpful backdrop for shareholders. In their statement Centrica say that eps for 2015 will be down on 2014 levels and that a strategic review of the business is in hand. This should be complete in time for the July 2015 interim results presentation. One of the points to be addressed is ‘Group financial framework’. This could mean anything from ‘it’s OK’ (less likely) to a further dividend adjustment and a capital raise (call me cynical). As a clue, even after the 30% dividend cut, future payouts ‘will be determined by the health and growth of the Group’s operating cash flow after tax’. To me that is far from a commitment that the re-based dividend has any sanctity. The shares have tanked today down nearly 9% at 256p. Even at these low levels they feel it appropriate to introduce a scrip dividend scheme to raise a bit of equity and conserve cash.

At 256p and guessing at 18p of eps, we have a PE of 14.2x and if 11.9p of dividend is paid, a yield of 4.6%. That might seem worthy of a nibble, but I just can’t help feeling that the strategic review might make investors more queasy, rather than calmer. (Neil Cumming^, 19^th February 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower