Energy price cap threatens Centrica’s earnings and dividend

That’s bad news for one of the FTSE’s most popular income stocks
Thursday 12 Oct 2017 Author: Steven Frazer

The Government has confirmed plans to introduce energy price caps across what prime minister Theresa May has called ‘the broken energy market.’

The news prompted a steep decline in the share price of Centrica (CNA) which looks likely to be worst hit by an Ofgem clampdown. It has also called into question the group’s future dividend payout plans, the main reason investors hold the shares.

The stock has fallen roughly 10% to 173.9p.

Centrica owns British Gas, by far the biggest single gas and electricity supplier to UK homes, with estimated respective market shares of 34% and 22%, according to Ofgem data.

The price cap ‘might cost Centrica something like £200m’ a year, calculates Neil Wilson, market analyst at ETX Capital. That figure chimes with previous estimates from investment bank UBS of ‘a reduction of £150m to £200m per annum or approximately one-third of Centrica’s UK supply margins’.

Profitable standard variable rate tariffs will come under attack by the energy watchdog.

Like other providers Centrica relies heavily on these standard variable rate tariffs with ‘about three-quarters of customers on these lucrative contracts,’ estimates ETX’s Wilson.

In 2016 Centrica reported £1.47bn operating profit from which it paid out £533m in dividends. This year the market anticipates roughly the same dividend on lower operating profit of £1.43bn.

Centrica was forced to cut its dividend by 30% between 2013 and 2015 to 12p per share, a level at which it has remained. The company had hoped to return to a ‘progressive’ payout policy going forward, but those plans may now have to be put on hold.

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