These two stocksshould be classic utility plays defensive and offering a steady income. Has it worked out that way inpractice?
Youve got the power
A dividend cut isalways a shock but itdoesnt have to be the end of the world.British Gas owner Centrica (LSE: CNA) slashed its dividend by 30% in February 2015 after reporting a 35% dip in profits, a move that wiped 1.2bn off its share price. In February this year it cut its dividend again, by 11.5%, afterreporting a 12% drop in group profits. Followingthat double blow you might notthink there was any income left, but you would be wrong. Currently, Centrica yields 5.5%.
The companyneeds to pay a handsome dividend because share price growth has been downright ugly. It is down almost 10% over the past 12 months, against growth of almost 10% across the FTSE 100 as a whole. It still trades more than 30% lower than five years ago. Last year it was the tough commodity sector that was to blame for Centricas dividend misery, although it rose to the challenge with a raft of cost and efficiency savings.
Brrr
This should help to keep the cash flowing, pay down debt, and fundthose all-important dividends. A cold winter or a further rise in energy prices would help to give it an extra lift, but although gas and oil prices have shown some signs of life, the recovery appears to have stalled for now. Losing customers for six years in a row hasnt helped either, even if it still boasts around 30 million.
Earnings per share(EPS) are forecast to fall 11% this year (the thirdsuccessive annual drop) but there may besome respitewith a predicted6% risein 2017. Operating at 12.4 times earnings and with the forward dividend covered 1.3 times Centrica looks solid, but is nobodys dreamboat.
United we stand
This hasnt been thebest year for utilities, with water company United Utilities (LSE: UU) down 7% over the past 12 months. However, this follows a healthy run, which means its share price is still more than 50% higher than five years ago. There was some excitement in this usually becalmedsector lastweekwhen SocGenreversed its view on the undervalued stock from sell to buy and predicted that there was scope for special dividends. It saidrecent share price weakness now implies a total shareholder return of 18%.
United Utilities already yields a thirst-quenching 4.1% with scope for growth as management aims to deliver RPI-linked progression. It will be interesting to see whether this will be possible if inflation starts picking up as predicted, but should offer investors some respite from rising prices.
Dream on
One concernwith United Utilities is that after years of steady earnings per share theyactually dipped 5% in the year to 31 March, and areforecast to fall another 5% to March 2017, before stabilising.Another is itshigh valuation, currently at 20 times earnings. However, the intensifying search for yield suggests that investors will stand squarely behind United Utilities. While not exactly a dream stock, it does at leastoffersome respite from the income nightmare.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
