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Centrica cuts dividend after energy price fall

British Gas owner says dividends will be 30% lower as a result of falling energy prices.

 

by Daniel Grote on Feb 19, 2015 at 09:48

Centrica cuts dividend after energy price fall

British Gas owner Centrica (CNA) has cut its dividend by 21% and warned of further reductions to payouts in response to falling energy prices.

The energy supplier has cut its dividend to 13.5p per share, from 17p last year, and said future payments would be cut by 30%.

The company has also cut its exploration and production budget by £400 million, as it reported a 35% fall in 2014 profit due to weak energy prices. Earnings per share (EPS) in 2015 are expected to be lower than 2014's 19.2p figure and Centrica has launched a review of strategy to be completed by July.

'2014 was a very difficult year for Centrica and the recent fall in the oil and gas prices creates further challenge,' said chief executive Iain Conn.

'We are cutting investment and costs in response. However, it is with regret that, along with reducing capital expenditure and driving efficiency beyond planned levels, we have taken the difficult decision to rebase the dividend by 30%, commencing with the final distribution for 2014.'

Shares fell 8% to 258.6p on the news. 

John Musk, analyst at RBC Capital Markets, said the dividend cut hadn't come as a major surprise. 'With CNA yielding over 6% before the dividend cut, it could be argued that the market was already partly pricing in the dividend cut,' he said. 'Post cut, the yield is 4.8%, which is broadly in line with integrated peers; however, we still believe this will be taken negatively by the market.'

Musk argued the cuts to earnings guidance were more significant. He argued the 15x price-earnings (P/E) ratio Centrica was trading on prior to this morning's slump was 'too high for a company facing so many challenges (balance sheet, commodities, Competition and Markets Authority (CMA) investigation, UK elections).' 

Mike van Dulken, head of research at Accendo Markets, said any benefits from the strategic review were likely to be 'slow to materialise'. 'The company still has to contend with pre-election political pressure to keep energy prices low given the recent fall in oil/gas prices as well as the CMA investigation into overcharging by the big six UK energy providers,' he said. 'Work to do to fire up a share price recovery.'

Centrica is a favourite of many equity income fund managers. Neil Woodford holds 2.5% of his £4.7 billion Woodford Equity Income fund in the stock, and earlier this year protested at the political pressure being placed on utility companies to pass on the fall in oil prices to consumers.

'The political risk that is now very evident in this industry, ultimately poses a pretty material risk to the long-term viability of the industry,' he said in a blog post.

'As long as the industry is treated as a political football, it is unlikely to invest in the UK's energy infrastructure - at a time when the UK economy badly needs that investment!'

Other big investors in Centrica include the £9.5 billion Newton Real Return and £4.5 billion Global Higher Income funds and the £2.2 billion Trojan Income fund. 

4 comments so far. Why not have your say?

patchy

Feb 19, 2015 at 16:13

"Shares fell 8% to 258.6p on the news".

My guess is that 258.6p will seem to good price to have sold at should Labour win!

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Law Man

Feb 19, 2015 at 16:43

The lower dividend at 13.5 pps is still over 5% of 258p. As Patchy indicates, it all depends on the result of the election. If Labour does not get in, and you are patient enough to wait until oil/ gas prices rise, you could do well; and are earning 5% in the meantime.

Like everything a gamble, but I shall retain my modest Centrica holding.

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Ark Welder

Feb 19, 2015 at 17:50

Safer to assume that the next interim will be cut by the same amount, giving a prospective yield of 4.66%.

Can't say that I've ever had my gas and electric bills being reduced by 30%, so good job I don't subscribe to the theory of buying shares in companies that provide my goods and services.

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ynys

Feb 23, 2015 at 00:29

I assume centrica have to buy gas from someone. If that is at a lower price shouldn't that be beneficial to them, even if they have to drop price to consumer somewhat? Will other energy firms have to drop THEIR dividend too?

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