Over the last year, shares in Centrica (LSE: CNA) have been a huge disappointment. Thats because they have fallen by 21% and, even worse, Centrica has rebased its dividend to a level that is 30% lower than where it was previously. As such, the total return from Centricas shares has been rather poor.
A Challenging Period
Of course, this is perhaps to be expected. Centricas business is not solely one of domestic energy supply (it accounts for around two thirds of the company). In fact, Centrica remains a sizeable exploration play and, with the price of oil and gas having come under severe pressure since the summer of last year, investor sentiment for resources companies has declined. As such, Centricas share price has been hit hard.
In addition, Centrica and stable mate, SSE (LSE: SSE), have seen their share prices also come under pressure due to the political uncertainty surrounding the General Election. There were fears that a Labour victory would cause a price freeze and tougher new regulator and, since the Conservative victory, both companies shares are up due to this not being the case.
Looking Ahead
Clearly, Centricas bottom line is likely to remain more volatile than that of SSE as a result of continued uncertainty regarding the price of oil and gas. Looking ahead, however, both companies are expected to increase their earnings next year, with growth of 3% being forecast for Centrica, while SSE is due to post a rise of 6% in its net profit. While neither figure is particularly impressive, such performance is likely to be welcomed by investors that have endured a challenging period for both companies.
Income Prospects
While Centrica and SSE have many similarities, as outlined above, their income prospects is what really separates them. For example, while Centrica yields considerably more than the FTSE 100, with it having a yield of 4.5% versus around 3.5% for the wider index, SSE is among the highest yielding stocks in the index, with a yield of 5.7%. And, looking ahead, SSE is set to almost match Centricas dividend growth rate next year, with dividends per share forecast to rise by 2.7% versus 3% for Centrica, thereby maintaining SSEs income appeal on a relative basis throughout 2015 and 2016.
Strategy
Although the two companies have very similar valuations, with SSE having a price to earnings (P/E) ratio of 14.5 versus 14.7 for Centrica, the formers better earnings outlook and greater consistency should provide it with more appeal for investors. Furthermore, Centrica is in the midst of making major changes to its business model, with a new management team likely to overhaul the future direction of the business. While this could be a positive in the long run, Centricas performance in the short to medium term could include greater volatility than that of SSE. This is perhaps best evidenced by the two companies betas, with Centricas beta of 1.1 indicating greater volatility than SSEs beta of 0.8.
As such, for investors seeking a more defensive business model, lower volatility, a higher yield and improved growth prospects for 2016, SSE seems to be the better choice at the present time.
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Peter Stephens owns shares of Centrica and SSE. 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.
