A top rated City research team has examined the credentials of Europe’s utility stocks and taken the red pen to Centrica PLC (LON:CNA).
Deutsche Bank has gone to ‘sell’ from ‘hold’ on the owner of British gas and reckons the shares are worth 180p (current price 219p).
“Centrica’s cost cutting, dividend cut and equity issuance over the last two years have put it on a more sustainable footing,” said analyst Martin Brough.
“However, we expect the UK energy retail market to face upward pricing pressure in 2017 from costs of renewable energy, network investment, smart meters, capacity payments and energy efficiency.”
Of the 11 analysts logged as following Centrica, four are in the ‘sell’ camp, three are ‘buyers’, while the remainder have ‘neutral’ recommendations.
The consensus price target has remained fairly static over the last six months at 230p a share.
Assessing the outlook for the sector, Deutsche’s utility team said the average dividend yield of sector is currently 5.3%, giving a total return of 8-9% once earnings growth of around 3% is factored in.
While this is well above interest paid on 10-year government bonds, which ranges from 0.5-2%, it may not be enough to hold investors’ attention long term, the German bank told clients.
“If the world moves into higher bond yields, higher inflation and higher growth then it may not look compelling on a relative basis,” clients were told.
Here in the UK Deutsche repeated its ‘buy’ advice on United Utilities (LON:UU), Severn Trent (LON:SVT) and Pennon Group (LON:PNN) .
It retains ‘hold’ recommendations on National Grid Group (LON:NG. and Drax (LON:RX).
It nudged down its valuations marginally for all six home-grown companies mentioned in the report.