Centricas(LSE: CNA) British Gas subsidiary has announced today that it is cuttinghousehold gas prices by 5%, helping shave 35 off the average household energy bill.
This is the second time in six months that British Gas has passed cost savings on to customers as part of the companys initiative to improve customer service.
British Gas new CEO Mark Hodges has built his reputation on an ability to improve customer service, and this round of price cuts will go a long way to improvingcustomer relations.
Improving relations
British Gas now offers thecheapest standard electricity prices of all the large suppliers across nearly 90% of the country. Whats more, the company is rolling out a number of devices, such as Hive Active Heating controls andsmart meters to help consumers reduce energy consumption.
However, it remains to be seen if these initiatives will convince new customers to give BritishGas a try. Customer numbers werebroadly unchanged at around 14.8m during the first three months of this year after the first round of price cuts.
Centrica needs to ignite growth at British Gas before the group can mount a full recovery.
Indeed, income from British Gas accounts for the majority of the Centrica groups income. Last year, after the averagehouseholder energy bill dropped by 100 due to warmer weather, Centricas overall profit contracted by 35%.
Unfortunately, its unlikely that this move to cut prices will return British Gas and Centrica to growth. Centrica is struggling, and its not just the British Gas arm thats holding the group back.
Review underway
Centricas management is currently conducting a strategic review of the groups operations, which, when complete, is expected tooutline hundreds of millions of pounds in cost savings as well as a plan to boost Centricas credit rating.
Its likely that theaxewill fall on Centricas North Sea gas fields first as part of the restructuring. Selling off these assets will help the company clean up its debt-laden balance sheet and curb capital spending.Management has already announced that it is curbing capital spending on North Sea projects by around 40%, to 800m this year. A further cut to 600m is expected next year.
Overall, its clear that Centrica is in crisis mode and for defensive, income-seeking investors,SSE(LSE: SSE) is the better pick by far.
Steady growth
SSE has proven over the past decades that it is, broadly speaking, a stronger company than Centrica.
For the past five years, SSEs revenue has grown atcompoundannual growth rate of around 8% per annum. However, margins have come under pressure, and earnings per share have slipped by 10% since 2011.
On the other hand, over the past five years Centricas revenue hasincreased by 31% but EPS have declined by 30%.
Further, since 2011, after including dividends, SSEs shares have returned 60% for investors. Centricas shares have lost 5%, even after including dividends.
According to City forecasts, Centricas dividend yield will total 4.4% this year while SSEs yield will come in at 5.6%.
The bottom line
All in all, choosing between SSE and Centrica comes down to your own personal risk profile.
If it’s stability you’re after, SSE is the best pick. However, if you’re willing to take on some risk in exchange for increased reward, Centrica could be a better pick.
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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.