You can keep your dividend yield of 6.3% for 2020. You can also take your bargain-basement P/E ratio of 8.2 times and chuck it away. Centrica (LSE: CNA) is a share I reckon will sink again in 2020.
City analysts are expecting the British Gas owner to rebound from more than half a decade of annual earnings dips on the bounce (another drop is, surprise surprise, forecast for 2019). Current consensus suggests that the bottom line will rip 36% higher next year. Quite how the number crunchers can be quite so optimistic is beyond me, I’m afraid, as Centrica’s customer base continues to implode — the FTSE 100 firm’s latest trading update showed another 107,000 packed their bags in the four months to October.
It was happy to state that “the rate of UK energy supply net losses was lower than in the first half of the year and significantly lower than in 2018,” though this clearly isn’t a statement about which to get carried away. Intense competition means that clients continue to switch away from British Gas in massive numbers, a trend that looks likely to persist next year as the growing pressure on household budgets forces more and more into the arms of those cheaper, independent suppliers.
Other problems that Centrica has to grapple with in 2020 are the recent reduction in the price cap by Ofgem and the possibility of more tariff cuts; the (admittedly unlikely) possibility of the Labour Party winning power at this month’s general election and going on a renationalisation spree; and slowing global economic growth dragging down oil prices, and with them profits at its fossil fuels division.
The Footsie company took the major step of announcing plans to exit oil & gas production, as well as the nuclear power generation business, at its half-year results. Exiting the production of dirty fuels is probably a good idea as the world moves increasingly towards green energy, and huge investment in fossil fuels by non-OPEC nations threatens to swamp the market in oceans of unwanted oil into the 2020s. But given the uncertain outlook at British Gas, it’s unsurprising that the investment community didn’t jump for joy when the news was announced.
More dividend pain?
Centrica’s share price has slumped a whopping 40% so far in 2019, meaning that its market value has shrunk by almost three-quarters in that time. A number of dividend reductions hasn’t helped either, the latest one for this year resulting in a 5p per share reward versus the 12p one for 2018.
It would be folly to suggest that the business is done with slashing shareholder payouts, too. With Centrica wrestling with that murky earnings outlook, a ballooning debt pile (net debt surged 17% year on year to £3.4bn as of June), huge restructuring costs and vast pension contributions. So the chances of the energy giant failing to hit City estimates of another 5p dividend in 2020 are high. There’s a long list of FTSE 100 income shares offering up big dividend yields right now. I’m afraid, though, that Centrica’s high risk profile means that it isn’t one that I myself will be buying today.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019