Centrica Final Results

[idpickering]

IAIN CONN, GROUP CHIEF EXECUTIVE

“2016 was a year of robust performance and progress in implementing our customer-focused strategy. We delivered our key objectives including improved customer service and more innovative offerings and solutions – while repositioning the portfolio, building capability and driving significant cost efficiencies. 2016 was a busy year for the team, but we have delivered a lot, and Centrica enters 2017 a stronger company – with encouraging underlying momentum and positioned to deliver longer-term returns and growth.”

HEADLINES

"Customer-led strategic repositioning on track
• Shift in investment towards customer-facing activities from E&P and Central Power Generation.
• New offers in energy and services focused on delivering choice, improved engagement and loyalty.
• Investment in customer service resulting in lower complaints and improved NPS.
• UK energy supply accounts broadly flat in H2 2016 after a 3% reduction in H1 2016.
• In Connected Home 527,000 hubs installed at the end of 2016. Hive brand introduced into North America.
• B2B acquisitions have added leading capabilities and are performing ahead of expectations.
• Establishment of ‘Centrica Innovations’ to drive growth and access new technology and innovation.
• E&P capital expenditure down 28% to £518m, within the £400m-£600m targeted range.
• Exit from wind power generation ownership completed with sale of Lincs windfarm; Trinidad & Tobago E&P divestment announced; Canada E&P sale targeted for 2017. "

And later on;

"The Directors propose a final dividend of 8.40 pence per ordinary share (totalling £461 million) for the year ended 31 December 2016. The dividend will be submitted for formal approval at the Annual General Meeting to be held on 8 May 2017 and, subject to approval, will be paid on 29 June 2017 to those shareholders registered on 12 May 2017. "

http://www.investegate.co.uk/centrica-p ... 0000Z8135/

[ayshfm1]

8.40 is a small cut from last time.

[Gengulphus]

For context, that's a dividend held at a total of 12p for the year, with a very small tweak to the interim:final split - it was 3.57p:8.43p last year, theis year it's 3.6p:8.4p.

Gengulphus

[idpickering]

Not liked by the market, and is down 3.2% as I type. They are one that I was considering topping up going forward, but I've never had a smooth ride from holding them, so probably will do nothing currently. Anyone topping up?

Ian.

[kempiejon]

Ian,

Centrica break one my preferred selection criteria of an increasing dividend history, just a couple of years ago they rubbed a few pence of the dividend. Year ending Dec 2013 they offered 17p per share, the following year only 13.5p, then 12p for last year and this. Not helping grow my income so no more money from me. They might well be on the upward trend from here but I'll try other choices with higher yield and better history. I do hold Centrica and wouldn't consider selling.

[idpickering]

Ian,

Centrica break one my preferred selection criteria of an increasing dividend history, just a couple of years ago they rubbed a few pence of the dividend. Year ending Dec 2013 they offered 17p per share, the following year only 13.5p, then 12p for last year and this. Not helping grow my income so no more money from me. They might well be on the upward trend from here but I'll try other choices with higher yield and better history. I do hold Centrica and wouldn't consider selling.

You covered my points better than I in your post there kempiejon. I agree with you. In fact, as discussed in my Feb 17 top up thread, I bought into UU. yesterday in order to bring on a water utility for further diversification in the overall sector.

Ian.

[mike]

The small reduction in the final dividend is explained in this papagraph from the link in the OP (my bold)

The 2016 proposed full year dividend per share is maintained at 12.0p. With continued strong cash delivery and net debt reduction, in line with our policy to deliver a progressive dividend in line with adjusted operating cash flow growth, we would currently expect to restore a progressive dividend when Group net debt is in the range £2.5bn-£3.0bn. We believe this is the appropriate level consistent with our financial framework parameters given our existing portfolio of businesses and the current environment for commodity prices, interest rates and inflation. We are targeting Group net debt in the £2.5-£3.0bn range by the end of 2017.

So it looks like the dividend will/should/may start increasing at the end of the current year.

Mike

[DYOR]

Following the 2016 results announcement on 22 Feb, I’m asking myself 2 questions on Centrica’s dividend policy.

Question 1: Would it have been reasonable to expect a dividend increase on the latest results?

As at the end of 2016, Centrica had a cash balance of £2bn. Based on the 2016 cash flow statement (p. 26 of the prelims available from Centrica’s website), this is how they got there:
Opening cash balance of £900m,
Proceeds of the equity placing of £700m,
Net net of all other cash flows movements, a further £400m

Generating £400m of net cash, predominantly through operations, is commendable. Particularly as £477m of debt was also repaid during 2016. Holding on to all £2bn of cash is perhaps less commendable.
So the answer to my first question is, perhaps investors were reasonable to expect an increased dividend in 2016 (particularly in light of that £700m equity placing…)

Question 2: What is the likelihood that dividends will increase at the end of the 2017 financial year? (this question was also posed to the CEO on results day, understandably)

Centrica’s 2017 forward guidance is cash flow from operations of ‘at least’ £2bn. This will be used on capex (capped at £1bn), which leaves a running total of £3bn of cash at management’s discretion. What could they do with this?

1. Repay more debt (granted, the 2017 interest bill (£200m in 2016), would need to come out of this pot too)
2. Make acquisitions
3. Pay dividends
4. Use / keep as contingency

Management already stated that net debt needs to reduce by a further c.£500m - £1bn range (bringing net debt down to between £2.5bn and £3bn) before a progressive dividend policy will be considered. As an aside, this debt reduction can already be done by using the existing £2bn cash balance, so why wait if debt is such a focus area? Furthermore, the capital structure is far from leveraged as it is.

So unless
(i) trading this year materially undershoots expectations (a separate topic altogether),
(ii) we see some large cash acquisitions (a brave move, but never impossible), or
(iii) management continue to feel they need to hold an enormous cash cushion (perhaps a knee-jerk response off the back of the recent years’ dividends cuts)
we could very well see a progressive dividend policy instated by the end of 2017.

Thoughts?
Disclosure: I hold Centrica shares

[77ss]

Not liked by the market, and is down 3.2% as I type. They are one that I was considering topping up going forward, but I've never had a smooth ride from holding them, so probably will do nothing currently. Anyone topping up?

Ian.

Thinking about it. The current yield is 5.33% and there seems to be some prospect of an increase next year. Numbers heading in the right direction at least.

[Wizard]

Not liked by the market, and is down 3.2% as I type. They are one that I was considering topping up going forward, but I've never had a smooth ride from holding them, so probably will do nothing currently. Anyone topping up?

Ian.

Foregive a newbie question, but having cut the dividend in 2014 and 2015 how can Centrica meet the criteria for an HYP share? I understand them being discussed here as they may be held in HYPs having been bought in the past. I understand they may be a share that could be bought for capital gain if the buyer speculates on recovery, but that is not part of HYP. Are they HYP eligible as a purchase though?

Terry.

[moorfield]

Are they HYP eligible as a purchase though?

Well perhaps not now if you apply the orthodox Pyadic theory. I've held CNA since 2009 and suffered the dividend cut, but that wasn't enough to blow the high and rising income from my whole portfolio off course through 2014-15. Currently #3 in my top up table so I may well be topping it up early next year.

[funduffer]

Foregive a newbie question, but having cut the dividend in 2014 and 2015 how can Centrica meet the criteria for an HYP share? I understand them being discussed here as they may be held in HYPs having been bought in the past. I understand they may be a share that could be bought for capital gain if the buyer speculates on recovery, but that is not part of HYP. Are they HYP eligible as a purchase though?

Terry.

Absolutely right. CNA is off my top-up list until it can demonstrate a sustained and growing dividend over a few years.

When I made my Utilities pick for my HYP three years ago I chose CNA. I wish I had chosen SSE!

Holding for now.

FD

[Wizard]

...not now if you apply the orthodox Pyadic theory. ..

That is exactly my point, this is where we discuss the practical application of "orthodox Pyadic" theory. Don't get me wrong I am not making a comment about whether the discussion is off topic for this board (personally I am not worried about such matters), but rather I am trying to understand if anyone considering a new purchase or top up sees such a decision as consistent with the application of HYP.

Terry.

[kempiejon]

Foregive a newbie question, but having cut the dividend in 2014 and 2015 how can Centrica meet the criteria for an HYP share? I understand them being discussed here as they may be held in HYPs having been bought in the past... Are they HYP eligible as a purchase though?

Terry.

Terry, you have it, cutters do not get in my HYP. Income safety is difficult to judge for even the near future, impossible for the further future but I use the past as a hint. I bought and will hold, they are not now a buy as per my HYP guidelines of a rising dividend history, ideally over 5 years. I would allow some flex of the guidelines but there are plenty of other high yielders within the utilities business better suited.

[moorfield]

I am trying to understand if anyone considering a new purchase or top up sees such a decision as consistent with the application of HYP.

Terry

The aim of my point was that the phrase "high and rising income" as written into the original stone tablets applies to the whole portfolio. My interpretation of that is it does not necessarily preclude adding recent cutters, so I feel a top up of my CNA would be consistent with the application of HYP.
(I have posted elsewhere that I have extended this interpretation and aim for a target overall income each year which will determine whether I need to tinker any individual holdings - I haven't had to do that yet.)

M

[toofast2live]

it does not necessarily preclude adding recent cutters

Actually I think it does. I'm almost sure (but I know the archivists will know the detail) that PYAD stated a requirement (or was it a mere preference) for five years of rising dividends.

IMO it would not get through the screen for a new investment, or a top up.

SSE and NG would be the utility candidates in that broad sector of electricity gas & power.

[Raptor]

Foregive a newbie question, but having cut the dividend in 2014 and 2015 how can Centrica meet the criteria for an HYP share? I understand them being discussed here as they may be held in HYPs having been bought in the past. I understand they may be a share that could be bought for capital gain if the buyer speculates on recovery, but that is not part of HYP. Are they HYP eligible as a purchase though?

Terry.

Good question. If I was looking for a "new" share to buy then I would look elsewhere for one that meets "all" my criteria, which includes rising 5 year dividend, but one you have it already in your portfolio and are looking to top-up? To me that is slightly different, if they were clearly top of the pile, then if all else was OK then probably. So for me no not a HYP eligible purchase but as a top-up, what's not to like.

Raptor. Hold CNA, 8th in top-up list.

[idpickering]

Not liked by the market, and is down 3.2% as I type. They are one that I was considering topping up going forward, but I've never had a smooth ride from holding them, so probably will do nothing currently. Anyone topping up?

Ian.

Foregive a newbie question, but having cut the dividend in 2014 and 2015 how can Centrica meet the criteria for an HYP share? I understand them being discussed here as they may be held in HYPs having been bought in the past. I understand they may be a share that could be bought for capital gain if the buyer speculates on recovery, but that is not part of HYP. Are they HYP eligible as a purchase though?

Terry.

Hi Terry. I think one has to weigh each share on their own merits. You are correct they are a cutter. For the sake of maintain diversification, I'd be tempted to cut thrm some slack. Is there such a thing as a perfect HYP candidate? Some are better than others I grant you.

Ian

[idpickering]

I should add by the way. I don't think they're a good new buy, but as I have then on board already, I don't mind topping them up. Much in keeping with others here.

Ian

[77ss]

...not now if you apply the orthodox Pyadic theory. ..

That is exactly my point, this is where we discuss the practical application of "orthodox Pyadic" theory. Don't get me wrong I am not making a comment about whether the discussion is off topic for this board (personally I am not worried about such matters), but rather I am trying to understand if anyone considering a new purchase or top up sees such a decision as consistent with the application of HYP.

Terry.

A foolish consistency is the hobgoblin of little minds

It's your portfolio - you get to choose when to bend or break routine orthodoxy. In my view, normal HYP guidelines are an excellent starting point but I do not choose to regard them as tablets of stone.

I might not pick Centrica as a new purchase, when building up an HYP, but as a top-up to a mature HYP I see no problem. We are not all coming from the same place.