Investors in Centrica PLC (LON:CNA) were burnt on Thursday as the market fretted over whether the owner of British Gas could be about to cut its very generous dividend payments.
Reporting full-year 2018 results, the FTSE 100-listed firm maintained its total pay-out at 12p per share, but made no mention of future dividend plans as the group detailed extensive cost-cutting plans in the face of a “challenging external backdrop”.
READ: Centrica plunges on dividend worries as British Gas owner warns on 2019 numbers after mixed 2018 results
Iain Conn, the company’s group chief executive said: ”Our 2019 financial performance will be impacted by the UK default tariff cap and continuing lower volumes in E&P and Nuclear, meaning our 2018-20 target range for average adjusted operating cash flow is under some pressure.”
The CEO continued: “We are taking actions to strengthen the company in 2019 and improve underlying performance in 2020, including driving cost efficiency hard and delivering further divestments”.
The warning came as Centrica reported a 12% increase in 2018 adjusted operating profit to £1.39bn, boosted by higher commodity prices, as revenue rose by 6% to £29.7bn.
Centrica investors ignored those historic numbers though, with the shares driven nearly 12% lower to 121.05p amid worries over the outlook for 2019 and beyond.
George Salmon, equity analyst at Hargreaves Lansdown commented: “The group may have delivered higher profits and cash flows this year, but those numbers are just a function of the rising oil price, which has helped the offshore business mask wider issues.”
But, he added: “The fact the group has had to warn investors about next year’s cash flows is the real story, and has potential to impact the dividend longer-term.”
“The bad news for Centrica is that the weaker outlook comes from a multitude of factors – the Government’s price cap, continued outages in the nuclear business and weak offshore production activity.
“While it hasn’t called out customer losses as a factor, 742,000 UK retail customers have left over the last 12 months, and surely more will follow,” Salomon said.
Dividend starting to creak
Salmon concluded: “This all means the dividend is starting to creak. It’s been held at 12p this year, but Centrica is increasingly relying on cost cutting and disposals to prop up the payment. Neither can continue forever.
“We wouldn’t be surprised if a cut was around the corner, especially given the group has previously stated it was only comfortable committing to the dividend if it could generate over £2.1bn of adjusted operating cash flow, a figure that now looks out of reach next year.”
Fiona Cincotta, senior market analyst at City index concurred: “Although a much-feared reduction in Centrica's dividend hasn't been explicitly announced today, the writing is pretty much on the wall.”
She added: “Centrica's dividend yield was a whopping 8.7% heading into today's result. Further falls in the share price today indicate just how few investors are betting that the dividend to stay untouched at 12p per share."