Are Centrica PLC, SSE PLC And Drax Group Plc ‘Screaming Buys’?

Should you buy these 3 utility stocks right now? Centrica PLC (LON: CNA), SSE PLC (LON: SSE) and Drax Group Plc (LON: DRX)

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

2015 has been a hugely disappointing year for investors in Centrica (LSE: CNA), SSE (LSE: SSE) and Drax (LSE: DRX). That’s because all three stocks have fallen during the course of the year and, despite apparently being defensive utility stocks, they have been outperformed by a falling FTSE 100.

In fact, while the FTSE 100 has slumped by 3% since the turn of the year, SSE has fallen by 7%, Centrica is down 18%, and Drax has seen its share price collapse by a whopping 43%. Looking ahead, though, the performance of the three stocks could be very different.

The right time

A key reason for this as far as  Centrica goes is a new strategy which is likely to improve the company’s financial performance, provide increased resilience in future years, and also boost investor sentiment. That’s because the company will now move away from its aim of becoming a major oil and gas producer, with numerous assets set to be sold off in the coming years as Centrica seeks to become a pure play domestic energy supplier.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Although it could reasonably be argued that now is the wrong time to sell oil and gas assets, since their prices are heavily depressed, it appears to be the right time for Centrica to change its strategy. With annual cost savings of £750m, the company’s bottom line should seriously benefit from a pivot towards domestic energy supply and, with the oil price seemingly likely to remain at or around $60 over the medium term, selling up and moving on could prove to be a sound move and boost the company’s share price. With Centrica trading on a price to earnings (P/E) ratio of 12.8, there is significant rerating potential.

Hugely enticing

Similarly, SSE is also cheap at the present time. It trades on a P/E ratio of 13.3 which, while higher than that of Centrica, offers greater stability than its index peer. That’s because SSE is more reliant on the domestic energy supply market and, with a majority Conservative win at the General Election, the future of the industry and how it is regulated should be relatively secure in the coming years.

Like Centrica, SSE has a considerable debt pile and as interest rates rise the cost of servicing its borrowings could eat into profitability and also into dividend payments. However, SSE remains a hugely enticing income play, with a current yield of 6% and a dividend coverage ratio of 1.3. This shows that its dividend growth outlook remains sound, with the payout likely to increase by at least as much as inflation over the medium term.

Too downbeat

While SSE and Centrica appear to be worth buying, the investment case for Drax is less clear. Despite falling heavily this year (as mentioned), its shares still trade on a P/E ratio of 21.2. And, with net profit forecast to decline by 62% next year, they have a forward P/E ratio of 55.7, which indicates that they may have further to fall.

Although the plan to convert half of its boilers from coal to wood is a sound move, as a result of the UK’s continued move to greener, cleaner sources of electricity generation, the near-term outlook for the company remains too downbeat for it to be a buy at the present time. That’s especially the case since a number of other utilities offer generous yields, good value and some earnings growth potential.

This AI stock is attracting investors like Michael Bloomberg and Peter Thiel…

Why are these legendary investors, already wealthy beyond imagination, drawn to this opportunity? The allure lies in more than just potential returns; it's a vote of confidence in a company poised for long-term success.

Imagine a revolutionary AI company that's not just participating in the digital media landscape but reshaping it entirely.

Trusted by giants like Amazon, Disney, and Netflix, the company reported nearly £637 million in revenue last year, marking a robust 7.8% growth over three years. Its impressive market reach and spirit of innovation are just the beginning of its story.

Best of all, we’re thrilled to offer you an exclusive glimpse into this game-changing AI investment, absolutely free.

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Centrica and SSE. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Can this FTSE 250 underperformer turn things around in 2025?

After underperforming since its IPO, shares in Dr Martens have finally started to show some life. Is 2025 the year…

Read more »

Investing Articles

Here’s what £20,000 invested in Rolls-Royce shares at the start of 2024 is worth today

2024 was another brilliant year for Rolls-Royce shares, which almost doubled investors' money. Harvey Jones now wonders if the excitement…

Read more »

Investing Articles

Ahead of its merger with Three, is Vodafone’s share price worth a punt?

The Vodafone share price continues to fall despite the firm’s deal to merge with Three being approved. Could this be…

Read more »

Dividend Shares

3 simple passive income investment ideas to consider for 2025

It’s never been easier to generate passive income from the stock market. Here are three straightforward investment strategies to consider…

Read more »

Investing Articles

I was wrong about the IAG share price last year. Should I buy it in 2025?

The IAG share price soared in 2024 and analysts are expecting more of the same in 2025. So should Stephen…

Read more »

Investing Articles

Here’s the dividend forecast for National Grid shares through to 2027

After a volatile 12 months, National Grid shares are expected to provide a dividend yield of 4.8% for the company’s…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Growth Shares

2 exceptional growth funds that beat Scottish Mortgage shares in 2024

Scottish Mortgage shares generated double-digit returns for investors in 2024. But these two growth-focused investment funds did much better.

Read more »

Investing Articles

If a 40-year-old put £500 a month in S&P 500 shares, here’s what they could have by retirement

A regular investment in S&P 500 shares could help a middle-aged person build a million-pound portfolio. Royston Wild explains.

Read more »