Why I’m Still Unsure About Buying Centrica PLC

Shares in Centrica PLC (LON: CNA) are now much more appealing than they once were, but I’m still not buying

As someone who holds a good handful of utility shares, it may seem strange that I don’t have any shares in Centrica PLC (LON: CNA) (LSE: CNA.L) in my portfolio. The reason for this has always been quite straightforward. I felt as though the company was a bit of a halfway house between a utility play and an oil and gas stock; never offering the best of both.

In other words, I’ve always been of the view that Centrica’s dividend is not quite as secure as those of its utility peers. And with its business model being subject to the whims of the oil price, its profitability was never quite resilient enough for me to bump one of my other utility stock in favour of Centrica. Similarly, I felt that other oil and gas plays offered a better quality and more diversified asset base than Centrica, so it’s never been a part of my holdings.

This has turned out to be quite a good move for me, since Centrica’s shares have fallen by 39% in the last three years. Now, though, Centrica is changing. It’s moving away from its oil and gas business and towards being an energy supply company. Therefore, I’m becoming more interested in buying a slice of it since I feel it will become a more resilient business with a more stable dividend outlook.

As today’s update from Centrica showed, it’s going to be a long road to recovery. Centrica is losing customers and is in the midst of savage cost cuts. However, I think they could work and lead to a better business in the long run, although there are likely to be painful days ahead as any transition is rarely a smooth one.

With Centrica yielding 5.2%, it is clearly tempting as an income play. However, what concerns me is that Centrica’s pace of change appears to be rather rapid and while dividends may not be cut, there seems to be more chance of that occurring than is the case for most of my current utility holdings. Therefore, while I’m seriously considering buying Centrica, I I’ll wait for further progress before adding it to my portfolio.

The author does not hold shares in Centrica at the time of writing.

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