Centrica at 268p, after the interim figures. The management with these results has demonstrated that it has stopped the rot in terms of cash flow, which now covers dividend costs by a multiple of times, compared with position shown a year earlier. The company says that it plans to restore shareholder value and now seems to be in a much better position to do that. I think the shares, after their fall in price, now look attractive as a much more reliable looking income stock on good estimated dividend yield.
We have had the results. Will the shares now bounce? Since April the shares have been moving sideways, in a trading range of approximately 260p to 284p. Tracing the share price back to March, the shares are arguably just approaching or on a three months plus support line, holding out the possibility that Centrica shares could technically, with the right fundamental support, start heading towards the share price territory of 300p which the market last saw in October 2014; prior to that, the shares peaked at just above 400p in late 2013. But the world of energy prices and consumer expectations has changed radically since then. So did the results reveal plans and facts that indicate that there may be a possible recovery in the Centrica share price?
First, the management had to slow down the mammoth cash absorbing, expansionist business that had been built up before the collapse in energy prices. Second, it had to improve the efficiency of its profit and loss account. Third, it had to re-plan Centrica’s future with a new strategy that takes account of radical new circumstances. The last set of annual accounts to December provide evidence of confusion in the short term, before the management was able to get a grip on its new, and evidently largely unforeseen, dramatic change of circumstances last year. The contrast between the confident, expansionist first half of 2014 and the startling retrenchment of the second half is instructive.
Second, there was a 71% increase in cash held on the 30th June balance sheet compared with that held the same day a year earlier. This year there was £1,063 million of cash. Current liabilities were down by about 28% and short term bank overdraft borrowing was hacked back by 71%. Whereas the company was working capital deficient the year before, to the tune of nearly £1 billion, current liabilities were pretty much in line this time, thus helping to reduce bank borrowing.
On the operational cash flow account, cash flow rose by 31.5% to £1,343 million. In addition – in order conserve cash – the ordinary share dividend was crunched from the £605 million paid out last year by 60% to £238 million. In short, the company has moved quickly to staunch the cash outflow in deference to changed prospects. That puts a platform under the Centrica financial edifice.
Turning to the interim profit and loss account, the Group’s activities comprise not only UK British Gas energy and power supplies but its international business (including North Sea exploration and production), it’s Irish energy and power supply and its US supply business.
Overall, Group revenue in the six months to 30 June 2015 fell by only 2%. Group operating profit increased a reported 31.5% and net attributable profit was up by 97% to £1,050 million. Earnings per share came in at a reported 21.0p, or double the figure of 10.5p reported for the same period up to 30th June 2014.
With regard to strategy, it is my reading of the situation that they will attempt to improve shareholder value in a number of ways: most probably including disposals of North Sea exploration and production of wholesale energy; getting back to being a retailer of domestic power and energy; greater economic efficiency (reducing the labour force and presumably raising labour productivity); and competing on customer service.
So what does the latest market consensus make of it in terms of earnings and dividend forecasts (particularly after the big dividend cut)? Having cut back the annual dividend by a fifth from 17p per share in 2013 to 13.5p per share, the last market estimate for the annual dividend per share this year was 12p. It looks as though we may have seen the worst of the dividend cutting and that the estimated 12p a share for this year may even be a touch conservative. It is to be noted that operating cash in the first half of last year covered the cost of dividends only 1.7 times. This year, that figure has increased to 5.6 times. On an annual dividend of an estimated 12p, Centrica shares (at 267p a share) offer a prospective dividend yield of 4.5%. Now that the finances have been put back in order it is possible that the actual payout could be a bit higher, as suggested above.
The dividend is the clue to the future progress of the share price. On a market consensus PER of 15 times this year’s estimated earnings, the shares now seem to be back to fulfilling a role as an income stock with a PER pretty much in line with the market PER. I remain bullish about economic activity in the UK, Ireland and the US and the outlook for equities in general. In consequence, I rate Centrica shares as attractive.