Centrica’s December 2017 preliminary results statement wasn’t great reading. The company which owns British Gas and a number of other energy-related businesses, reported operating profit down 17% to £1,252m. Earnings were down 22%, earnings per share down 25% and so it went on.
Yet amazingly, Centrica declared a dividend of 12p, unchanged from 2016. The dividend was declared on 22 February 2018 and the stock goes ex-dividend on 10th May with payment on 28th June. Why does this interest people? Because it’s possible to buy the stock to take advantage of the dividend. And when a stock has had a bad year, and produced a weak annual report, its stock price can take a dive which means that its yield – the dividend – looks very attractive. That’s why stocks often rise just before the ex-dividend date, as buyers move in to take a short-term profit. Afterwards, they sell the shares and the share price drifts back down again unless there has been a major change of sentiment in the interim.
Normally dividends belong to whoever owns the stock. But after the ex-dividend date, if you buy the share, you don’t get the next dividend. In the case of Centrica, the stock goes ex-dividend on 10 May 2018. If you buy the share on or after that date, you won’t get the dividend due to be paid out on 28th June. That dividend will go to the person who owned the shares on or before 10th May and you’ll have to wait for the next dividend payment. This is so that the registrar has some hope of sorting out the share register and getting payments to the rightful owner.
Do people buy just for the dividend?
Will investors pile into Centrica in the days leading up to 10 May, simply to get the income? The answer is almost certainly yes. In fact even major fund managers are not above doing this simply to boost returns on their fund. The fact is that at the time of writing, Centrica’s yield is 8.57% because the share price has taken such a knocking. From a high of 220p, it has been as low as 123p and is currently trading at around 140. It’s down 35% from a year ago and 63% from five years ago.
Centrica is on a price/earnings ratio of 8.29 which is a result of the decline in the share price. However, this is a large company with a £7.85bn market capitalisation. In April 2018 Credit Suisse gave it an “outperform” rating and suggested a target price of 175p. If you can bag an 8.5% dividend and then get a bit of growth, the proposition begins to look a little more attractive.
The trouble for Centrica began in November 2017 when the company admitted that it had lost 823,000 gas customers in only four months. It suffered the worst drop in its share price for 20 years. It then said it would need to operate with its lowest ever dividend cover – 0.5 – in order to maintain the dividend. Needless to say, the market reaction was swift and brutal.
How is Centrica going to address its problems?
here is a plan to cut 4,000 jobs and find another £500m of cost savings by 2020. The trouble is, that the increase in competition for domestic consumers, and restrictive actions on tariffs by the government, are both likely to continue. Centrica has blamed North American operations for much of its poor performance but analysts and observers are convinced the major problems are closer to home.