There’s no doubt that Centrica (LSE: CNA) has been a disappointing investment in recent years. A number of dividend cuts haven’t helped.
Despite this, I think investors who have written off the owner of British Gas as a lost cause are mistaken.
Indeed, I reckon the Centrica share price should be of interest to income investors at the moment. In this article, I’ll list three reasons why I’m bullish about the outlook for this unloved stock.
#1: Services growth
Over the last year, the number of customer signing up for Centrica’s home services has risen sharply. Customer numbers in the group’s consumer division rose by 528,000 during the first 10 months of last year.
The company is generating growth by selling more services and home solutions. Examples include boiler maintenance and the company’s Hive connected home products. By tilting its strategy towards services, Centrica hopes to improve its profitability and reduce its exposure to volatile energy prices.
We don’t yet have much financial information about the services business. But press reports I’ve seen have suggested that selling services is more profitable than selling gas and electricity. If this is correct, then Centrica’s fast-growing services business could drive earnings higher over the next few years.
#2: 20m customers can’t be wrong
Despite all the talk about British Gas losing customers, it remains by far the UK’s largest energy supply business. The latest figures available show Centrica’s UK Home division as having 12m energy supply customers and 7.7m services customers.
By comparison, SSE has around 6.2m domestic customers. Eon has about 4.3m. These numbers suggest to me that Centrica’s consumer business should still enjoy very attractive economies of scale in the UK market.
It’s also worth noting that the rate at which energy supply customers are leaving British Gas is slowing. I think that one reason for this is the high failure rate of small low-cost energy suppliers. Many of these firms turned out to have weak finances and flaky business models. Making money by undercutting the big energy suppliers isn’t quite as easy as it sounds.
#3: Slimmed-down strategy
Centrica CEO Iain Conn is on the way out, having exhausted shareholders’ patience. But I think the strategy he’s put in place will probably deliver decent results, eventually.
Mr Conn is slimming down the business to be a consumer-focused energy supply and services business.
Spirit Energy, the group’s jointly-owned oil and gas production firm, is up for sale. So are the company’s interests in the Hunterston B and Dungeness B nuclear power stations. Estimates suggest that Centrica’s stake in Spirit could be worth around £1.5bn. If Mr Conn can find a buyer before he leaves, it would help to reduce the group’s £3.4bn net debt.
I reckon the stock is cheap
Centrica’s dividend has been cut a number of times. If you remember the 17p payout of 2013, you probably won’t be too pleased with the 2019 forecast dividend of 5p.
But I think these cuts have been necessary. The good news is that the dividend looks fairly safe to me at current levels. Analysts expect earnings to rise by about 35% this year, which should cover the dividend 1.9 times.
At current levels, Centrica shares offer a forecast yield of 5.5%. With earnings set to rise in 2020, I think now could be a good time to buy.
The post Why I rate the Centrica dividend as a buy appeared first on The Motley Fool UK.
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Roland Head owns shares of Centrica. 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 2020