Centrica(LSE: CNA) may carry one of the largest dividend yields on Britain's elite share index, but I for one wouldn't touch the energy supplier with a bargepole.
The British Gas owner has seen its share price plummet during the past five years (by 60%, to be precise) and, as the rampant erosion in its customer base shows no signs of abating, you can only conclude that further deterioration can be expected.
Customers still fleeing
The FTSE 100 play recently announced that while "high levels of competitive intensity continue in our core markets," it added that "net consumer customer account losses in the year to date have slowed materially relative to the average of 2017." This may be true, but the rate at which Centrica is losing clients is still pretty shocking -- some 110,000 British households upped sticks and left during the first four months of 2018, thanks to the supplier switching culture washing over the UK.
With economic conditions only toughening in its home market it's only natural to expect this migration to continue as customers shop around for a better deal on their energy usage. Indeed, the decision to hike costs for those on its standard variable rate tariff by an average 5.5% in April is likely to see a further slew of customer departures -- some 4.1m people will be affected by the price increase.
But the threat from the independent, promotion-led suppliers isn't the only reason to be fearful over the future of British Gas. As my Foolish colleague Rupert Hargreaves recently pointed out, Centrica is operating in an increasingly politically-hostile environment. And a range of measures to curb the excessive charges of the Big Six operators, from price caps to possible nationalisation, cannot be ruled out.
Fear the worst
All things considered, it would appear a hard ask for Centrica to flip back into profits growth any time soon. And while the business has been able to freeze dividends more recently rather than hack them down, I reckon further annual reductions could be in store.
City analysts certainly think so, and are forecasting that last year's 12p per share reward will fall to 11.8p this year, and again to 11.2p in 2019.
Sure, glass-half-full investors will point to the consequent yields of 8.1% and 7.7% for 2018 and 2019, respectively, as reasons to invest. But I believe that these projected cuts could be a tad optimistic. For one, dividends are covered just 1.1 times by projected earnings through to the close of next year, well below the widely-regarded security benchmark of 2 times.
What's more, while Centrica is doubling down on efforts to cut the cost base, I fear this will come a too-little, too-late situation, given the size of its hulking debt pile. Net debt clocked in at £2.6bn at the close of 2017 and this is expected to range £2.5bn-£3bn in the current period.
Now Centrica may be cheap, the firm dealing on a forward P/E ratio of 10.9 times. But this doesn't impress me. I'd much rather shift out of the stock today given its poor earnings picture.
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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.