Life isnt getting any easier forCentrica(LSE: CNA). Afterbeing forced to slash its dividend payout by 30% earlier this year, following a 35% slump in profits, the company has cautionedtoday that further losses could be on the horizon.
In a trading update, the company said thatgas use by its residential customers rose by 10% in the first three months of 2015. Centrica also warned thatprofits from its residential business are being more than offset by lower commodity prices.
According to the company, its oil & gas production arm has continuedto be impacted by the low commodity price environment. Centrica has already been forced to write down the value of its North Sea production assets once and further write downs shouldnt be ruled out.
Additionally, management has announced that it is cutting Centricas capital spending budget by around 40%, to 800m this year. A further cut to 600m is expected next year.
A better pick
As Centrica flounders,National Grid(LSE: NG) is powering ahead.
Unlike Centrica, National Grids business is relatively predictable. Earnings may fluctuate slightly year-to-year due to one-off costs and other charges, but for the past five years National Grids revenue has grown at a steady rate of around 1% per annum. Costs have held steady and net income has jumped by 81% since 2010.
Centricas business is much more unpredictable. True, the companys revenue has increased by 31% over the past five years. However, Centricas operating margin, excluding one-off items, has slumped from around 15% to 5% since 2010. Net income has more than halved over the period.
As a result, Centricas shares have severely underperformed the wider market.In particular, 10,000 invested in Centrica at the end of 2011, would be worth around 9,500 today, including dividends. A similar investment in National Grid would be worth just under 20,500 today, including dividends. The FTSE 100 turned 10,000 into 13,500 over the same period.
The numbers stack up
So, its clear to me which company has been the better investment. Whats more, it looks as if National Grids outperformance is set to continue.
Indeed, if theres one thing the market hates its uncertainty, and Centricas outlook is extremely uncertain.
For example, the companyhas warned thatLabours policy pledge to freeze energy prices could put it out of business. And as noted today, low oil prices are curbing the profitability of Centricas downstream operations.
Nevertheless, even after slashing its dividend payout by 30% earlier this year, Centricas shares still support a dividend yield of 5.1%. National Grids shares only offer a yield of 4.6% at present.
However, while Centrica supports the higher yield, it is always better to choose quality over quantity. National Grid has proven that it is the better company of the two.
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