Why I'd buy this beaten-up dividend stock instead of Centrica plc
It has been a difficult year for home improvement retailer Kingfisher(LSE: KGF). Its stock is down 20% in that time, and trades just 9% higher than it did five years ago. Investors in British Gas owner Centrica(LSE: CNA) have had an even worse time of it, with a 17% drop over 12 months, and 44% over five years.
Both companies remain FTSE 100-listed giants, with respective market caps of £6.0bn and £10.43bn, and both face major long-term challenges, but could prove lucrative in the longer run. First, they are available at bargain valuations, trading at 12.02 and 11.13 times earnings respectively. Their share price slumps could actually make today an attractive buying opportunity.
Both also offer robust income streams. Kingfisher is trading on a forecast yield of 3.5%, healthily covered 2.2 times. Centrica offers a whopping 6.4%, with cover notably thinner at 1.3. So you get juicy dividends to tide you over while waiting to see if their share prices can recover lost value. So what are the chances of that happening?
Kingfisher describes itself as Europe's leading home improvement retailer with over 1,100 stores across 10 countries. This month it has offered investors a rare moment of cheer by reporting better than expected first-half results, with total sales up 4.5%. However, there were disappointments in there too, with like-for-like sales down 1.3% due to weaker sales in France and disruption to its UK business from product availability, although the Screwfix and Poland operations both delivered solid growth.
This is a company in transition and there are signs of progress, with new customer lines well received. Shareholders continue to benefit from company munificence, with £159m of ordinary dividends paid out year-to-date, and £200m of share buybacks, completing £400m of a planned £600m. The transformation will take time, but City analysts are pencilling in forecast earnings per share (EPS) growth of 11% in 2018. Dividend growth should be progressive, with the yield heading for 4%. Kingfisher could rise again.
Centrica was a rock-solid utility play until Ed Miliband's threatened energy price freeze in 2013, and although Ed is politically dead, investors have been cold on the stock ever since. The oil price plunge wreaked further havoc and British Gas is also losing domestic gas and energy customers, shedding 261,000 in the first half of the year despite not raising prices (it has since hiked them 12.5%), although it remains the market leader with 14.2m in total.
Centrica also faces political threats, with renewed talk of an energy price cap. Jeremy Corbyn's resurgent Labour Party is on the attack, with plans to nationalise the energy sector and no guarantee that shareholders will get market price for their stocks. This is something investors should factor into their thoughts.
The yield is mind-boggling, but primarily reflects share price weakness. The dividend was 17.5p in 2013, last year it was held at 12p for the second year running. City analysts see signs of recovery in 2018, with forecast EPS growth turning positive at 4%, and the dividend climbing to 12.93p, lifting the yield to 6.6%. Centrica is tempting, but also troubled.
Harvey Jones 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.