Centrica: Patient shareholders will share in windfall profits

Centrica is a bold utility indeed. The customers of the British energy group are faced with rising energy costs – some of which are paid for with public funds. It is asking the government for help to rehabilitate the Rough gas storage field while making big money from the commodity boom. Now it has decided to divert £250m of its record profits in 2022 into buying back shares.

Surely that waves a red rag at British Chancellor Jeremy Hunt’s windfall tax bull? Well maybe. But Centrica — whose retail business is cleaning up failed competitors and supporting the energy transition for the long term — has good reasons to keep shareholders on its side.

A trading update from Centrica has improved its earnings outlook for this year. It should post £1.5 billion in net income this year, six times more than in 2021. The problem is that the extra cash will come from its remaining upstream and power generation businesses, as well as from trading. This is unlikely to last forever. Commodity markets will eventually decline, and the production profiles of aging nuclear reactors and oil and gas will decline over time.

Lex diagrams show: The utility has a very good crisis. Centrica cleaned up its balance sheet, resumed its dividend, and announced a buyback. Obviously, it wants to keep shareholders on the side. Even after the recent stock price surge, Centrica still trades at just 3.4 times forward earnings.

At its core, Centrica is an energy supplier for private customers that needs long-term oriented investors. A disastrous push by UK energy regulator Ofgem to increase competition in this space resulted in market failures, including Bulb, which required a government bailout worth around £4bn. Britain clearly needs energy suppliers that the government does not have to support.

That helps explain why Centrica is throwing a chump at its long-suffering investors. It has fixed its balance sheet and has net cash. Shares remain at just 3.4 times 2022 earnings. Total returns for shareholders – which could amount to £430m this year in dividends and buybacks if the latter complete before the end of the year – should be a quarter of that net profit amount. That’s historically low for Centrica.

Profitable energy companies are attractive targets for windfall taxes. But the government would be unwise to bash Centrica given its central role in the energy system.

City Bulletin is a daily briefing from the City of London, delivered straight to your inbox when the market opens. click here available five days a week.

https://www.ft.com/content/cdb08d8a-fbe9-45f1-9969-73a4ccd33316 Centrica: Patient shareholders will share in windfall profits

Adam Bradshaw

TheHitc is an automatic aggregator of the all world’s media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, all materials to their authors. If you are the owner of the content and do not want us to publish your materials, please contact us by email – admin@thehitc.com. The content will be deleted within 24 hours.

Related Articles

Back to top button