Utility firms such as Centrica (LSE: CNA) wont be enjoying all this mild weather weve been having. Its bad for business: no one uses much gas or electricity, and that wreaks havoc on energy suppliers cash flow.
To tell you the truth, Im a bit fed up with it myself. Cold seasons should be cold; so that we can all eat lots of comfort food and then wear baggy cloths to cover up the effects!
Tough trading
Centricas weather-related problems have been an issue for sometime. As long ago as July the chairman said that the first half of the year saw challenging market conditions, both due to the weather and reflecting the wider political environment. Continuing unseasonable conditions wont be helping one bit. Maybe thats why the share price slid from 345p in January to 298p today.
Yet the uncertainties in Centricas business model have weighed heavy for a long time. Ten years ago, we could pick the shares up for 220p. Theyve only advanced by 35% in a decade suggesting that, although dividends remained robust, inflation must surely have neutralised the total returns of those holding the shares. Reinvesting dividends might have helped but, overall, Centrica has been a relatively poor investment over the period unless there were significant special dividends or capital returns along the way.
However, Im looking at the chart just as it has zigged. If we look at the last ten years, Centricas share price often zags, too, so picking up a few in the hope that 2015 may turn out to be a better year for the firm strikes me as a decent trading proposition. After all, trading stalwarts largely drove legendary investor Peter Lynchs remarkable investment performance, and if its good enough for him
Diverse operations
Centrica has upstream and downstream operations in roughly equal proportions, which makes it a bit different from some other utility firms. Theres also a good geographic spread of operations, with around 66% of Centricas revenue coming from the UK, 28% from North America and 6% from the rest of the world.
Downstream activities supply both gas and electricity, as British Gas in Britain and as Direct Energy in the US. This utility part of the business delivers steady cash flow to support Centricas dividend.
|
Year to December |
2009 |
2010 |
2011 |
2012 |
2013 |
|
Net cash from operations (m) |
2,647 |
2,428 |
2,337 |
2,820 |
2,940 |
|
Dividend per share |
12.8p |
14.3p |
15.4p |
16.4p |
17p |
Then theres the feint whiff of upside potential wafting from upstream operations, which include oil and gas exploration, production and storage activities; owning and operating combined cycle gas turbine (CCGT) electricity-generating power stations; offshore wind generating operations; and a 20% stake in EDF Energys UK nuclear power stations.
What now?
Assuming that weather patterns revert to the mean over the long run, Centrica will probably keep lumbering on and keep paying its dividend. That said, an extended period of near sub-tropical winter conditions could easily see the dividend off and sink the share price.
Centricas forward dividend yield is running at around 6% for 2015, and the forward P/E rating runs at almost 13. City analysts following the firm expect earnings per share to decline 21% this year followed by a 12% rebound in 2015.
Despite Centricas chunky looking dividend payout and vague growth potential, Im not a fan of the firm as an investment. If we are thinking of total investment returns, perhaps we should look elsewhere for companies with strong trading franchises that can really drive wealth creation if we buy the shares at sensible prices.
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Kevin Godbold 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.
