Where next for Centrica PLC’s dividend?

Could Centrica PLC (LON:CNA) (CNA.L) post improving dividend performance?

Centrica PLC
Centrica PLC

At the moment, Centrica PLC (LON:CNA) (CNA.L) is one of the highest-yielding shares in the FTSE 100 according to my research. Following a share price fall of 58% in the last five years, the company has a dividend yield of 8.8%. That’s twice the FTSE 100’s dividend yield, and may mean that the stock has income appeal at first glance.

Of course, it’s been a difficult five years for the business. In fact, it’s somewhat surprising that it has such a high yield, since its dividend has been cut during that period. Alongside this, it has experienced challenging trading conditions, political risk, regulatory risk and uncertainty as a result of its decision to overhaul its business model.

In future, I feel that Centrica could lack the defensive appeal of some of its industry peers. I believe that the changes it is making to its business model may create a stronger entity in the long run, but may mean that it experiences a period of instability in the short run.

Alongside this, political risk remains elevated to my mind. The threat of a Labour victory in a general election and subsequent nationalisation of the domestic energy supply industry could keep investor sentiment pegged back. In my view, this is a real risk ahead of Brexit, with it being a known unknown how the political climate will look in six months’ time.

As well as this, I feel that Centrica faces regulatory risk. There seems to be a political consensus that variable rate tariffs need to be limited, and the cap could become more challenging over time.

Therefore, while the stock has a high yield, I view it as a relatively risky FTSE 100 share. That said, its yield suggests it may offer a margin of safety, and in future years I feel that its current strategy could provide recovery potential and improved share price performance versus the previous five years.

About Robert Stephens 5151 Articles
Robert Stephens is a CFA Charterholder and an Equity Analyst by trade. He is a passionate private investor who has been buying and selling shares for many years, owning a wide range of UK shares in the process. He has written for Citywire and The Motley Fool US and now runs his own business. To contact Robert, please email [email protected] or use one of the other contact methods available on the 'Contact Us' page