Does Centrica crash threaten the dividend?

Centrica's (CNA) army of small shareholders are used to disappointment after the British Gas owner’s steady share price descent of the past four years. But today’s crash would have been difficult for even the most battle-hardened punter.

From 400p in 2013, the blue-chip stock is now languishing at 138p having slumped as much as 18% early doors in the wake of a profits warning and the dramatic loss of 823,000 UK home customers in just four months.

Judging by the anguish on Interactive Investor message boards this morning, there’s an air of resignation among investors. “It goes from bad to worse”, said one, while another questioned the future of chief executive Iain Conn.

Conn, who slashed Centrica’s dividend when he took charge in January 2015, sought to put a positive spin on the performance by highlighting a strengthened balance sheet and efficiency savings ahead of target.

Significantly for the company’s 500,000 or so small shareholders, Conn said the current level of full-year dividend was underpinned. But a forward yield of over 9% at current prices implies a lack of confidence among market participants.

That’s where the positives appear to end as Conn admitted that “some aspects of our delivery in the second half of 2017 have been disappointing”.

Full-year earnings per share (EPS) will be around 12.5p, which is below the market consensus of 15.5p due to the impact of lower-than-expected profits in the North American and UK business divisions.

It blamed highly competitive market conditions and low price volatility for putting significant downwards pressure on realised power margins.

The other headline grabber involved the heavy loss of UK retail customers. While this has been skewed towards low-margin customers, the figure was still much higher than analysts had feared.

Around 650,000 account losses came from collective switching and a fall in customers for energy sold through its Sainsbury's (SBRY) partnership. A price rise in September accounted for the rest of the departing customers.

The energy sector has long been a volatile area for investors, with speeches from politicians capable of hitting share prices. Centrica, for example, was badly affected in October after prime minister Theresa May chose the Conservative Party Conference to pledge a cap on energy prices.

Analysts from Macquarie and Citi were among those who now question whether Centrica’s dividend is at risk, despite the company’s reassurance.

Macquarie said: “Whilst the dividend yield is supportive – we see flat DPS at 12p a share out to 2020 – a flat 15p EPS for Centrica leaves limited wriggle room for any further disappointments.”

Citi added: “So there may not be near-term dividend risk (yield approaching 8%) but there is still a question over longer term sustainability though given the deterioration of the business and the impact of price cap measures.”

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.