Image source: Getty Images
Central (LSE: CNA) has been in the news recently, for all the wrong reasons. Well, your British Gas unit has made headlines after it was ordered to stop breaking in to install prepaid meters for struggling customers. But high gasoline prices have been good for investors, with Centrica’s share price rising 25% in the last 12 months.
However, the big question is whether we are seeing a near-term bubble inflated by high energy prices. If so, it could explode when inflation is under control. And fears for the future of fossil fuels could well help fuel stock price weakness over the longer term.
But I see some reasons to buy Centrica now. One comes from looking at the stock price in its longer-term context.
Prior to the pandemic, Centrica’s stock had been steadily falling. In the last five years, shareholders have seen their investment lose 22% of its value. Profits are down. And the 2019 dividend was slashed in the wake of the pandemic, before being put on hold entirely in 2020. But forecasts are looking up and the stock may be undervalued now.
Valuation
Based on forecasts for 2023, the stock has a prospective price-earnings (P/E) ratio of just four. For a company with a core product and defensive features, that could be cheap.
It looks like dividends could be back as well. Centrica appears to have cash to return to shareholders as it is currently buying back its own shares.
The company is due to publish 2022 results on February 16 and its January update was upbeat. The board expects adjusted earnings per share of more than 30 pence. That would mean a P/E of 3.2, in line with forecasts. And with apparently good cash generation, there should be net cash of over £1bn on the balance sheet.
dividends
No indication of full-year cash returns yet. But forecasts suggest a dividend yield of 3% and rising. That’s based on payments still considerably below pre-pandemic levels, mind.
But all this comes in a year of rising energy prices. PA and Shell they just posted record profits for 2022 as the entire oil and gas sector benefits.
In the medium term, I think prices will settle, inflation will subside, and the roaring gains of 2022 may not be repeated. And looking beyond that, renewable energy is the inevitable future.
Is it a purchase?
Would you buy Centrica shares today? Given the outlook for the next few years, I think they look very cheap. And if I could see a long-term future for the gas business, I’d buy them at today’s valuation. Maybe not a complete no-brainer, but super low P/E coupled with better dividend prospects would make Centrica a safe buy for me.
But I don’t really see the long-term prospects that I would need. In another 10 years, gas could be following coal as an undesirable way to heat our homes. And if you wouldn’t hold a stock for 10 years, you wouldn’t buy it. However, I think that you could be missing out on some short-term gains.
var config = {
apiKey: ‘1ed121d592e04642d57912bb369ef696621661a3’,
product: ‘PRO_MULTISITE’,
logConsent: false,
notifyOnce: false,
initialState: ‘NOTIFY’,
position: ‘LEFT’,
theme: ‘DARK’,
layout: ‘SLIDEOUT’,
toggleType: ‘slider’,
iabCMP: false,
closeStyle: ‘button’,
consentCookieExpiry: 90,
subDomains : true,
rejectButton: false,
settingsStyle : ‘button’,
encodeCookie : false,
accessibility: {
accessKey: ‘C’,
highlightFocus: false },
onLoad: function () { // hide Cookie Control recommended settings button.
var recommendedSettingsButton = document.getElementById(‘ccc-recommended-settings’);
if (recommendedSettingsButton) {
recommendedSettingsButton.classList.add(‘hide’);
} },
text: {
title: ‘Privacy Notice’,
intro: ‘This site uses cookies, pixels, and other similar technologies to improve your web site experience and to deliver you personalised ads about our own and third party products and services. Please read more about how we collect and use data about you in this way in our Cookies Statement in our Privacy Policy. You can change your cookie settings in your browser at any time. ‘,
necessaryTitle: ”,
necessaryDescription: ”,
thirdPartyTitle: ‘Warning: Some cookies require your attention’,
thirdPartyDescription: ‘Consent for the following cookies could not be automatically revoked. Please follow the link(s) below to opt out manually.’,
on: ‘On’,
off: ‘Off’,
accept: ‘Accept’,
settings: ‘Cookie Preferences’,
acceptRecommended: ‘Accept Recommended Settings’,
notifyTitle: ‘Privacy Notice’,
notifyDescription: ‘This site uses cookies, pixels, and other similar technologies to improve your web site experience and to deliver you personalised ads about our own and third party products and services. Please read more about how we collect and use data about you in this way in our Cookies Statement in our Privacy Policy. You can change your cookie settings in your browser at any time. ‘,
closeLabel: ‘Save Preferences and Close’,
accessibilityAlert: ‘This site uses cookies to store information. Press accesskey C to learn more about your options.’,
rejectSettings: ‘Reject All’,
reject: ‘Reject’,
},
branding: {
fontColor: ‘#fff’,
fontFamily: ‘Arial,sans-serif’,
fontSizeTitle: ‘1.2em’,
fontSizeHeaders: ‘1em’,
fontSize: ‘1em’,
backgroundColor: ‘#313147’,
toggleText: ‘#fff’,
toggleColor: ‘#2f2f5f’,
toggleBackground: ‘#111125’,
alertText: ‘#fff’,
alertBackground: ‘#111125’,
acceptText: ‘#ffffff’,
acceptBackground: ‘#111125′,
buttonIcon: null,
buttonIconWidth: ’64px’,
buttonIconHeight: ’64px’,
removeIcon: false,
removeAbout: false },
necessaryCookies: ( ‘wordpress_*’,’wordpress_logged_in_*’,’CookieControl’,’PHPSESSID’,’fivc’,’fivs’,’fivp’,’Ookie’,’Fool_subinfo’,’_gads’,’_gid’,’_gat’,’_ga’,’__utma’ ),
optionalCookies: (
{
name: ‘Sharing’,
label: ‘I would like content tailored to my personal preferences.’,
description: ‘We work with advertising partners to show you ads of products and services you may be interested in. You can choose whether or not to have ads delivered in a personalised way by setting this option. You can return to review this setting at any time by clicking the "C" logo in the bottom left corner of any page.’,
cookies: ( ‘_ga’, ‘_gid’, ‘_gat’, ‘__utma’, ‘_gads’ ),
onAccept: function () {
// Add Facebook Pixel
!function(f,b,e,v,n,t,s)
{if(f.fbq)return;n=f.fbq=function(){n.callMethod?
n.callMethod.apply(n,arguments):n.queue.push(arguments)};
if(!f._fbq)f._fbq=n;n.push=n;n.loaded=!0;n.version=’2.0′;
n.queue=();t=b.createElement(e);t.async=!0;
t.src=v;s=b.getElementsByTagName(e)(0);
s.parentNode.insertBefore(t,s)}(window,document,’script’,
‘https://connect.facebook.net/en_US/fbevents.js’);
fbq(‘init’, ‘901682110316659’);
fbq(‘track’, ‘PageView’);
fbq(‘consent’, ‘grant’);
// End Facebook Pixel
// Enable Google ad personalization
// gtag (‘set’, ‘allow_ad_personalization_signals’, true ) ;
},
onRevoke: function () {
fbq(‘consent’, ‘revoke’);
// Enable Google ad personalization
// gtag (‘set’, ‘allow_ad_personalization_signals’, false ) ;
},
recommendedState: ‘on’,
lawfulBasis: ‘consent’,
},
),
statement: {
description: ”,
name: ”,
url: ‘https://www.fool.co.uk/help/privacy-and-cookie-statement/’,
updated: ”
},
};
CookieControl.load(config);
