Is Now the Time to Buy Centrica?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at Centrica  (LSE: CNA  ) to determine whether you should consider buying the shares at 346 pence.

I am assessing each company on several ratios:

  • Price/Earnings (P/E): Does the share look like a good value when compared against its competitors?
  • Price Earnings Growth (PEG): Does the share look like a good value factoring in predicted growth?
  • Yield: Does the share provide a solid income for investors?
  • Dividend Cover: Is the dividend sustainable?

So let's look at the numbers:

Stock

Price

3-Year EPS Growth

Projected P/E

PEG

Yield

3-Year Dividend Growth

Dividend Cover

Centrica

346p

19%

12.8

2

4.5%

20%

1.6

The consensus analyst estimate for this year's earnings per share is 27 pence (6% growth) and dividend per share is 16.4 pence (7% growth).

Trading on a projected P/E of 12.5, Centrica appears to be cheaper than its peers in the utilities sector, which are currently trading on an average P/E of around 13.1.

Unfortunately, Centrica's P/E and moderate growth rate give a PEG ratio of around 2, which implies the share price is expensive for the near-term earnings growth the firm is expected to produce.

In addition, Centrica supports a 4.5% yield, slightly below the Utilities sector average of 5%. However, Centrica has a three-year compounded dividend growth rate of 20%, implying the payout could soon catch up to that of the company's peers.

Plus, the dividend is just over one-and-a-half times covered, giving Centrica some room for further payout growth.

The yield is below the sector average, so should you buy Centrica for its growth?
I believe Centrica, as a utility company, has a certain defensive quality about it. However, I see the utilities sector has recently been coming under pressure, as further government regulations and higher taxes have squeezed earnings. In particular, I can see Centrica is facing growing pressure from consumers as it increases prices in order to maintain profitability.

Furthermore, Centrica is currently facing accusations of manipulating the wholesale gas market, which allegedly pushed prices higher for customers. However, as Centrica notes, the wholesale gas market has more than 50 participants -- to some extent reducing Centrica's potential liability.

Still, Centrica is continuing to grow. Indeed, within its latest results, the company reported total first-half gas sales were up 9%.

Most importantly, I believe Centrica has a significant edge over its competitors. You see, unlike some utilities, Centrica has a well-diversified portfolio of power assets ranging from wind to nuclear. In addition, the company owns a number of upstream (producing) oil and gas assets in the North Sea, which have led to significantly improved profit margins for the firm.

So overall, there are some negative issues overhanging Centrica. However, I believe the company still looks cheap based on its diversified product base and upstream oil and gas assets. So, I believe now looks to be a good time to buy Centrica at 346 pence.

More FTSE opportunities
As well as Centrica, I am also positive on the FTSE shares highlighted in "8 Dividend Plays Held by Britain's Super Investor." This exclusive report reveals the favorite income stocks owned by Neil Woodford -- the City legend whose portfolios have thrashed the FTSE All-Share by 200% during the 15 years to October 2012.

The report, which explains the full investing logic behind Woodford's dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

link


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2215893, ~/Articles/ArticleHandler.aspx, 10/26/2014 3:02:59 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement