Centrica (LSE: CNA) has been regularly popping up in my stock filters these days, making me wonder if its finally time to buy. Shares in the owner of British Gas have recently fallen to a 21-year low, but can they really keep on sliding?
What do I mean by stock filters? I regularly run a scan of the FTSE 100, checking on various fundamental measures. I look for stuff like low P/E, high dividends, good dividend cover, low PEG, all kinds of things. And, increasingly, Centrica makes the cut.
Looking for undervalued dividend stocks, the other day I narrowed the FTSE 100 down to those with a dividend yield of 5% or more, cover by earnings of at least 1.3 times, and a P/E thats no higher than 14. And Centrica made the cut.
Earnings rebound?
Earnings at Centrica are expected to fall again this year, but analysts have EPS starting to climb again in 2020. That would put the stock on a forward P/E of around 11 for the current year, dropping as low as 8.5, based on next years forecasts.
Theres a dividend cut on the cards for this year too, after the firm had maintained its 12p per year for four years in a row while earnings were falling. And as an aside, thats something I dont like to see companies that stubbornly keep their dividends going until its almost too late. Sadly, its a very common thing. But Id much rather see dividends paid more variably as, and when, the cash is there to cover them reliably.
Anyway, even with forecasts suggesting the payout will be slashed to around 7.8p this year, and then nudged down to 7.5p next, that would still provide yields of 8.7% and 8.3% for the two years, respectively.
Dividend cover
Cover by earnings wouldnt be great. But wed be seeing 1.33 times by 2020, if these predictions are close to the truth, and that wouldnt be too bad in the energy sector where dividends are generally only modestly covered.
This isnt a picture of a company bouncing with health Im painting here. But, at the same time, it looks like it could be passing the bottom of its poor spell. I cant help feeling theres more pessimism in the share price than is justified.
Lets imagine a 25% upside and a share price rising to 112p. That would bring those P/E predictions to undemanding levels of 14 and 11 for the two years, respectively, and the dividend yields would drop to 7% and 6.7%. That would still represent a very desirable income level.
Trading
In its most recent trading update in May, Centrica told us things remain tough, but that its still on track for its cash flow and net debt guidance, with 250m of efficiency savings and 500m of non-core divestments expected by the end of the year.
Net debt should still be around 3bn-3.5bn, and I see that as the biggest risk right now. Interim results are due on 30 July, and debt will be the first thing Im looking for.
Would I buy Centrica shares? No, because of my cautious investing approach, and because these days I wont buy recovery stocks until Ive seen them recover. But for a bolder contrarian investor, I reckon Centrica could be worth a close look now.
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