Centrica explains promise of another big dividend

Having expressed his regret for a “very poor” performance in 2017, Centrica  (CNA)shareholders should at least be grateful that boss Iain Conn hasn’t compounded the misery by taking away their high-yielding dividend.

There’s been much speculation about the future of the 12p a share pay-out ever since a huge profits warning by the British Gas owner in November. But for the timebeing, Conn says the level of award will be maintained as long as net debt stays below £3.25 billion – it reduced by £877 million to £2.6 billion in 2017 – and the company keeps adjusted operating cash flow (AOCF) – down 23% to £2.07 billion last year – within its target of a £2.1 billion-£2.3 billion range.

This may still be a big ask, though, if headwinds remain as fierce as they have been in recent months. Operating profits were down by 17% to £1.25 billion in 2017, driven by intense competition in its North American Business unit and the impact of losing 10% of its UK energy supply accounts.

As Conn said in his blunt assessment of 2017 trading, these issues “created material uncertainty” and, “although we delivered on our financial targets for the year, this resulted in a very poor shareholder experience”.

“We regret this deeply, and I am determined to restore shareholder value and confidence.”

That poor experience for Centrica’s 500,000 small investors recently left shares languishing at their lowest point since 1999, compared with more than 400p in 2013. Today’s dividend reassurance at least helped the stock rally by more than 4% to 137.75p. UBS has a small upside, valuing Centrica at 165p.

The current yield is around 9%, but with good reason Centrica regularly features at the top of the FTSE (UKX) dividend danger zone table. Centrica has not been afraid to take an axe to its dividend in the past as in February 2015 the firm cut its dividend by 30% after operating profits disappointed.

Quite what represents fair value with Centrica is particularly challenging given the extent of its activities and the severity of the challenges it faces. Centrica warns, for example, that its guidance for the 2018-20 period could go out the window if a proposed UK tariff cap has a material impact on its business in 2019.

Meanwhile, Conn has pledged to step up the company’s focus on performance delivery and financial discipline, including by increasing its cost efficiency programme by £500 million to £1.25 billion a year by 2020.

He intends to pursue the sale of Centrica’s 20% stake in the UK’s fleet of nuclear power stations, and has ruled out big M&A deals for the foreseeable future. This is hardly surprising given the uncertainty surrounding the UK energy supply market and the company’s desire to maintain balance sheet strength.

Even after the implementation of a 12.5% increase in its standard electricity tariff in September, Centrica points out that it currently has the lowest standard tariff amongst the six largest suppliers. Adjusted profits in UK home division rose 1% to £819 million, despite the loss of so many retail customers.

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