Last summer, the share price of British Gas owner Centrica (LSE: CNA) fell to levels not seen in roughly 20 years. In a further blow for investors looking to generate income from their portfolios, the dividend was also cut by more than half.
Those remaining loyal could be forgiven for thinking that things couldn’t possibly get any worse. Unfortunately, that’s just what’s happened following today’s publication of a horrific set of full-year figures for 2019.
Let’s take a closer look at what’s caused more investors to throw in the towel.
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“Challenging environment“
As a result of falling natural gas prices, the introduction of the energy price cap by the government, and nuclear power station outages (collectively referred to as a “challenging environment“), the battered firm reported a huge 35% fall in adjusted operating profit to £901m. On a statutory basis, an operating loss of £849m compared to 2018’s profit of £987m was reported.
As one might expect, outgoing CEO Iain Conn tried to put a positive spin on things, highlighting that the company had managed to stem the outflow of customers to rival suppliers, make costs savings and keep adjusted operating cash flow and net debt within their target ranges. He went on to say that “performance during the second half was much improved compared to the first half”.
To say that the market was left unconvinced is putting it mildly. With shares down 17% today, I’m left wondering if there could be even more pain ahead.
Value trap
Before this morning, analysts were expecting a near-30% jump in earnings per share in 2020. Given that Centrica has now warned that it expects “very low current wholesale commodity prices” to continue impacting its operations, I suspect they may be reaching for their calculators again.
As such, I’d treat the valuation of just 9 times forecast earnings before the market opened with caution, even after the capitulation of its share price. The fact that, only yesterday, Swiss bank UBS suggested that Centrica was a ‘buy’ with a 110p price target shows the problems inherent in trying to ascribe a value to the company as it stands.
That the business appears to have slowed the rate of customers leaving it for other suppliers does not, of course, change the fact that the firm still faces huge competition going forward. Other, more nimble operators will simply continue to offer enticing rates to consumers who, thanks to the ease of switching, are now far less loyal than they once were.
This being the case, I actually think there’s a fair chance of another cut to the dividend in the future. Analysts have been penciling in a 5.08p per share cash return in FY20. That equates to a yield of 7.3% – well above the level at which investors traditionally begin to question whether such payouts are sustainable.
Adding to the pain is the recent news that Chair Charles Berry – who was taking the lead in searching for a new leader – will be taking time out to address a medical condition. This is yet another setback for a company that also faces the growing possibility of being ejected from the FTSE 100 (with a subsequent knock to the share price).
Taking all of the above into account, I remain convinced that investors should continue to avoid this value trap like the plague.
