The ownerof British Gas,Centrica(LSE: CNA), announced its first-half figures this morning, along with the results of its strategic review.
The company reported a 15% rise in adjusted earnings during the first six months of the year. Revenue fell 2% to 15.5bn, from 15.7bn reported a year ago. Earnings before exceptional items fell 3% to 1bn as higher profits fromcustomer-facing businesses were offset by lower profits at Centricas upstream gas andpower businesses.
Overall, Centrica reported adjusted basic earnings per share of 12.3p for the first half, up 17% year-on-year.The company also slashed its interim dividend by 30% following an earlier decision to reduce the payout.
Alongside these resultsCentrica also announced the results of its strategic review of the business, which was initiated in light of significantly changed circumstances.
And following the review, Centrica has concluded that it needs to refocus its growth efforts oncustomer-facing activities. Management has decided that the company will divert 1.5bn ofcapital from its upstream business that focuses on exploration, production and power generation, towards downstream,customer-facing operations such as British Gas.Management is looking to cut day-to-day group costs by 750m between 2015 and 2020.
6,000 jobs will go at the companys upstream arm as part of thesechanges. However, the group will increase its headcount in otherareas. A net reduction of 4,000 staff is expected overall.
Capital spending will be limited to no more than 1bn per year. 250m will be spent over the next five years growing the companysservice businesses with the UK and North America. A further 700m will be spent over the same period growing Centricas energyand power distribution segment. 500m will be spent to improve capacity and 150m to improve energy marketing and trading activities.
Improving cash flow is another key strategic target.Centrica said it aims to increase operating cash flow by 3% to 5% per year, underpinned by near-term efficiencies. Cash flow growth will be the basis of the groups progressive dividend policy.
Will take time
City analysts have already started to weigh in on Centricas restructuring plan. The consensus seems to be that the company is facing many execution risks going forward, but over the next few years, if everything goes to plan, Centricas health should improve.
Nevertheless, its clear that Centricas turnaround will take time and investors may find a better return withSSE(LSE: SSE).
Indeed, as Centrica shrinks, SSE is restructuring to improve returns, selling off low return assets in favour of assets that generate a high return on investment and boost shareholder returns.
For example, this week SSEentered into an agreement with French oil giantTotalto acquire a 20% interest in four North Sea gas fields andthe new Shetland Gas Plant. Total will remain the operator of these assets, and it is expected that this acquisition willenhance SSEs adjusted earnings per share by up to 5p from 2016/17 onwards.
The deal should help SSE maintain its lofty dividend yield for the foreseeable future. At present, the company supports a yield of 5.9%, and the payout is covered 1.3 times by earnings per share according to company figures. Centricas dividend yield stands at 4.4%, and the payout is covered 1.5 times by earnings per share.
Slow and steady
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Rupert Hargreaves 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.