Centrica: A FTSE 100 Dividend-Raising Star

Published in Company Comment on 7 November 2012

Can Centrica's dividend continue to beat the wider market?

In an outcome that's tough on investors, the FTSE 100 (UKX) has failed to deliver a rising dividend payout over the last few years.

Just look at the iShares FTSE 100 ETF (LSE: ISF), for example. This is an exchange-traded fund that tracks the benchmark index, and we can see the aggregate payment from Britain's top 100 companies has yet to regain its pre-recession peak:

Dividend per share19.1p20.2p17.1p16.2p18.1p

But some companies within London's premier index have performed well on dividends, despite these austere times, and this series aims to seek them out. One such name is Centrica (LSE: CNA).

The big question is can the company's dividend continue to out-perform the index. Let's take a closer look.

Centrica is one of the country's leading gas and electricity suppliers. With the shares at 326p, the market cap is £17 billion. This table summarises the firm's recent financial record:

Revenue (£m)16,27220,87221,96322,42322,824
Net cash from operations (£m)2357297264724282337
Adjusted earnings per share27.15p21.7p21.7p25.2p25.8p
Dividend per share11.57p12.63p12.8p14.3p15.4p

So, the dividend has increased by 33% during the last five years -- equivalent to a 7.4% compound annual growth rate.

Centrica demerged from British Gas in 1997 and has since grown the geographical spread and scope of its operations. It now supplies its UK customers with gas and electricity under the British Gas brand, and drain-cleaning, security and lock-fitting services under the Dyno brand. The firm also supplies energy to the North American market under the Direct Energy name.

As well as the downstream operations, an upstream business contributes about half of the group's UK profits. The company's power-generation assets and gas and oil production involve operations such as nuclear power, wind farms, gas-fired electricity generation, and oil and gas exploration.

Last year, around 87% of operating profits came from the company's UK business and the remaining 13% from North America. However, being a utility provider isn't the money tree it once was: rising wholesale-energy prices and exceptionally warm weather (causing lower demand for gas) made turning a profit hard to achieve during 2011. Indeed, Centrica's directors said the company's downstream UK energy business became loss making at one point. Fortunately, such travails didn't stop the dividend rising.

Centrica's dividend growth score

I analyse four different features of a company to judge whether its dividend can continue to rise:

1. Dividend cover: adjusted earnings covered the last dividend around 1.7 times. 3/5

2. Net cash or debt: net gearing is around 80% with borrowings about 2.3 times earnings. 3/5

3. Cash flow: cash flow supports earnings but has been trending down. 4/5

4. Outlook and recent trading: good recent trading and a cautiously positive outlook. 4/5

Overall, I score the Centrica 14 out of 20, which encourages me to believe the firm's dividend can continue to out-pace dividends from the FTSE 100.

Foolish summary

Centrica's recent trading and positive outlook are encouraging, while the group enjoys strong cash flow and is investing for growth, too. That all bodes well for the prospects of the dividend.

Right now, the forecast full-year dividend is 17.2p per share, which supports a possible income of 5.3%. That looks attractive to me.

Centrica is one of several dividend out-performers on the London stock exchange. And there's one man who's as keen as I am to find, and invest, in them.

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Further investment opportunities:

> Kevin does not own any shares mentioned in this article.

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