British Gas is not Britain’s most hated company. Not quite.
That accolade goes to Manchester United. According to a recent survey by researcher Online Opinions, 26% of the population hate the football club.
But British Gas comes a close second. It may be the UK’s leading domestic energy supplier, with almost 16 million customers, but 22% of Brits rank it their most disliked business. And unlike Man United, British Gas doesn’t have an army of loyal fans to balance out the detractors.
So last week’s profit warning from British Gas owner Centrica (LSE: CNA) may have raised a few cheers among the general public.
But what does it mean for the company’s shareholders – particularly those who bought Centrica on the back of our recent tip?
Hated by consumers, loved by shareholders
Being loathed by consumers certainly hasn’t done Centrica’s share price any harm. Over the last ten years, Centrica has increased operating profits by around fourfold.
That’s been reflected in rewards for shareholders too. The total return on Centrica stock, ie including re-invested dividends, has been more than 100% over that time. That compares to a 49% total return for the market as a whole.
So it may have come as a shock for some shareholders when the company issued a profit warning last week.
What happened? Apparently, the UK has been enjoying “unusually warm weather” of late. So consumers have been using less gas than Centrica had anticipated.
Meanwhile, the cost of wholesale gas – which is what British Gas has to buy in to supply its customers – is 26% higher just now compared with last winter. This all adds up to “significantly lower margins in the downstream residential business”.
In other words, selling gas to private households has become much less profitable than it was. As a result, Centrica’s profits for 2011 will be lower than the market had expected.
What does Centrica’s profit warning mean for you?
Profit warnings are never welcome. But on this occasion, there’s nothing to worry about.
Gas prices were raised by 18% in August. Other parts of Centrica’s business are doing well. Meanwhile, lower interest and tax charges will offset some of the damage to operating profits.
So the bottom line will be only “marginally lower” than expected. In fact, despite those warm weather effects, Centrica’s full-year earnings should still grow.
As for the future, the company knows its stuff. It’s cutting costs. And in the past, when margins have been squeezed, it has always managed to rebuild them in the longer run.
Sure, Centrica may not be expecting lots more Christmas cards from its customers. But shareholders should still be pleased with their investment. Since we tipped the stock at the end of July, it’s dropped by some 5%. With the overall market down 8%, that’s not bad in relative terms. And the mild profit warning is now baked into the price. On a p/e of 11, and with a prospective yield of over 5%, it’s well worth holding.
Another great energy supplier to buy
Meanwhile, another UK energy supplier also reported last week. National Grid (LSE: NG/) owns the high voltage electricity transmission network in England and Wales and operates the system across Great Britain. The group also owns and operates Britain’s high-pressure gas transmission system where it has 11 million customers.
‘The Grid’ is big in the US too. It distributes electricity to about 3.3 million homes and businesses in the northeast of the country, where it’s also the largest distributor of natural gas.
The US has been causing the firm – and its customers – a fair bit of hassle recently. In contrast to the UK, America’s autumn has been very chilly, with a wave of snow storms.
Add in the damage done by Hurricane Irene in August, and National Grid has been landed with a ÂŁ140m bill. So first-half operating profits to 30 September have dipped slightly compared with last year.
But strip these ‘one-off’ effects out, and underlying earnings for the period are up by 14%. And the interim dividend has been hiked, as the company had promised, by 8%.
National Grid isn’t as hated as Centrica. But in recent years, it hasn’t been popular with investors – it’s hardly the most exciting stock in the market.
But that’s one big reason why we’ve been keen on the shares. And now, the market’s view on The Grid looks like it’s starting to change for the better.
Since we tipped the stock months ago, it has flipped up by 5%. Compared with the overall market, that’s outperformance of around 17.5%. In other words, National Grid is being seen more and more as a classic defensive stock to hold in today’s troubled times.
If you don’t own the stock, it’s not too late to get on board. On a p/e ratio of around 13, and with a prospective yield of more than 6%, there’s still plenty for shareholders to look forward to. Note though, that if you want to snap up that interim dividend of 13.93p per share, you need to be holding the shares by the close of play on 29 November.
Category: Investing in Technology