Centrica - needs AP McCoy for these fences?

Centrica: The CEO, Iain Conn, wheeled out the customary new boy’s kitchen sink in February. That statement included the news that the dividend was being cut, amidst challenging trading conditions, by 30% from 17.0p to around 11.9p. Today, with the first quarter in the bag, we have an IMS. This states that the group is still trading in line with the guidance given in February, although within that there are two distinct themes. Whilst colder weather helped downstream profits (including a recovery in North America profits), low commodity prices have hurt upstream profits. The group wide strategic review continues and the results will be unveiled at the Interim’s announcement in July. For now, they point out that strengthening work on the balance sheet has included £1bn of new hybrid debt, with Moody’s latest rating (Baa1 – stable, from A3 negative), consistent with the group’s desire to keep an investment grade credit rating. Mind you the sheep-like Baa ratings are the lower end of Moody’s investment grades (Baa3 being the lowest). S&P recently re-affirmed an A- (negative outlook) on Centrica, three rungs off losing investment grade status

Looking ahead, the group points out their inherent uncertainties of weather, commodity prices, asset performance and regulation. It is the latter though, that is at heightened levels. The Competition and Markets Authority investigation is due to report in June, so its conclusions might even affect the final conclusions of the group’s strategic review. The competition report comes at a time of heightened political risk for all utilities, with the Labour Party seeing energy providers as nearly a Public Enemy. The only near certainty about May 7^th is that we are unlikely to have a clear result on May 8^th. However, there is a very good chance that we have a Labour minority government, somehow propped up by the SNP, who in turn sit to the left of Labour on the political spectrum. This is not a good scenario for Centrica (or other consumer facing energy companies).

For CY2105, consensus eps still seem to sit at 18p, but it just feels like there could be downward drift. Any drift still leaves the 11.9p dividend covered, but there is more work to be done shoring up the balance sheet. So, in July I would hope that the reduced dividend commitment is honoured, but events may just overtake Centrica. If the 11.9p for 2015 turns out to be correct then that is a decent yield of 4.5% at 265p, with a PE of 14.7x. That seems OK, but given the many Aintree size fences to jump in the next three months, is there really any rush to invest? (Neil Cumming^, 27^th April 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