British Gas parent Centrica PLC (LON:CNA) has maintained its 2018 dividend but analysts see the group cutting future payouts as earnings are expected to take a hit from an energy price cap.
In a trading update on Thursday, the company said it would leave its full-year dividend at 12p despite an estimated drop in adjusted earnings per share to 11.5p from 12.5p last year due to operational issues in the oil and gas arm, outages in the nuclear business and the loss of customers in the energy supply unit.
“Perhaps it would be better if British Gas owner Centrica just cut its dividend and got it over and done with," said Russ Mould, investment director at AJ Bell.
"A 9% dividend yield suggests the market is expecting such a move at some point anyway."
READ: British Gas owner Centrica expects energy price cap to hit 2019 earnings
Lee Wild, head of equity strategy at Interactive Investor, noted that Centrica is on track to save about £200mln this year as part of a cost-cutting plan. He also said Centrica’s estimated adjusted operating cash flow of £2.1-£2.3bn and net debt of £2.5-£3bn were “bang on target”.
“Based on today’s numbers, Centrica can easily afford the 12p annual dividend, but the market remains wary of anything that threatens the payout,” he said.
Energy price cap to hit earnings
The market is particularly wary of the impact of an energy price cap that is set to take effect on January 1.
Centrica expects the government-imposed cap to hit earnings and cash flow in 2019. It estimates a one-off negative adjusted operating profit impact of about £70mln in the first quarter.
“Centrica’s goal in the next couple of years is not an ambitious one, negotiate the new regulatory landscape while keeping the dividend unaffected,” said Nicholas Hyett, equity analyst at Hargreaves Lansdown.
“A dividend yield of approaching 9% this year suggests the market thinks it might find that difficult.”
Centrica loses energy customers amid tough competition
Another challenge for the company is retaining and attracting customers in what it describes as a competitive energy supply market. Centrica lost 372,000 customers in the UK in the four months to the end of October.
Graham Spooner, investment research analyst at The Share Centre, said profits at the UK’s biggest energy suppliers have been dented by competition from new start-up firms and face further pressure when the energy price cap sets in.
“There has been a trend in recent years of a move towards the ‘new energy industry’ with the rapid growth of start-up competitors such as Bulb,” he said.
“Recent years have seen accelerating market presence for renewable and distributed energy, driven by technology and consumer preferences.”
The tough competition prompted SSE PLC and Npower to announce plans to merge last year. The deal was approved by the Competition and Markets Authority in October but a month later, SSE admitted there was "some uncertainty" that it would go ahead after delaying the tie-up due to the incoming energy price cap.
The two had been hoping to complete the merger in the first quarter of 2019 but SSE said this was likely to be delayed as talks over the terms of the deal will take several weeks.