Sunday 24 February 2019 11:03 am Interactive Investor Talk

Are Centrica shares a buy at 20-year low?

What is city talk? Info Info. Latest

At prices not seen since 1999, a 10 per cent dividend yield appears tempting, but it's not that straightforward.

Two years ago, Centrica (LSE:CNA) shares were worth over 230p. Today they dived 12 per cent to just 120p. Last time they were that low you could have bought a loaf of bread for 51p* and Shanks & Bigfoot's 'Sweet like chocolate' was number one. But is that any reason to buy Centrica shares?

You'd expect the chief executive to put a positive spin on the numbers, but even Iain Conn admits the company's financial performance in 2018 was "mixed", and that disappointments last year would spill over into 2019. This year could be no better than the last.

Higher commodity prices gave adjusted operating profit a 12 per cent boost this time to £1.392 billion, and adjusted operating cash flow improved by 9 per cent to £2.245 billion. Net debt was £2.656 billion.

Source: TradingView, monthly chart (**) Past performance is not a guide to future performance

Crucially, and as expected this time, the numbers were within the target ranges required to sanction a final dividend of 8.4p, giving an unchanged 12p payout for the full year, equivalent to a 10 per cent yield at today's prices. To maintain the dividend, cash flow had to be between £2.1 billion and £2.3 billion and net debt of £2.5-£3.0 billion.

However, a shortfall at British Gas, hit by warmer weather during December, was largely responsible for a 10 per cent slump in adjusted earnings per share (EPS) to 11.2p, less than the "around 11.5p" guided by the company in November.

And the company admits to plenty of challenges in 2019. The UK government's default energy tariff cap, introduced on 1 January 2019, will impact operating cash flow, outages are hitting nuclear volumes, while its exploration and production business Spirit Energy will remain in the lower half of its 45-55 million barrels of oil equivalent (mmboe) range.

Of course, cost savings and other efficiency savings will offset some of the impact, but not all of it, which is why cashflow guidance for 2019 is cut to £1.8-£2.0 billion, a drop of £350 million on 2018 and below the targeted range of £2.1-£2.3 billion average over 2018-20.

Given this was one of the measures used to decide the level of dividend payout, it’s no surprise to see fears about shareholder returns triggering heavy selling Thursday.

Sam Arie, an analyst at UBS, thinks the shares are worth no more than 135p. He says: "We expect a negative reaction to today's results due to the lower than expected cashflow guidance for 2019 and lack of offsetting positives at the fundamental level. Risks to the dividend are clear and rising, in our view."

Source: TradingView, daily chart (*) Past performance is not a guide to future performance

*Office for National Statistics data 1999

**Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.

These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. 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.