Investors in British Gas-owner Centrica (CNA) must appreciate that implied dividends cannot be taken at face value.

After slumping again today - the share price is down more than 7% at 134.95p - the payout from the UK energy group stands at nearly 9%, if you believe it can maintain the targeted 12p per share dividend.

That is a big ‘if’. In a trading update Centrica insists that current payout expectations can be maintained. But then comes the caveat that this situation depends on the company being able to meet targets on year-end net debt and operating cash flow.

SCANT CAUSE FOR OPTIMISM

A warning of a hit to earnings and cash flow from the new energy price cap, coupled with operational problems at its upstream oil and gas business, hardly fill investors with confidence.

The UK energy industry is going through unprecedented change with the planned price caps on standard variable tariffs being the latest challenge to navigate.

Switching between providers has never been easier and that continues to eat into Centrica’s British Gas customer base.

It lost another 372,000 customers in the four months to 31 October, although as AJ Bell’s investment director Russ Mould notes this is not as alarming as the 823,000 lost in the same period in 2017.

So far this year Centrica has delivered significant cost savings and appears to be keeping a lid on borrowings. With just a few weeks to go until year-end, both guidance for adjusted operating cash flow between £2.1bn and £2.3bn and net debt between £2.5bn and £3bn are bang on target for the full-year targets.

WHAT ABOUT 2019 AND BEYOND?

Presumably, management have enough information to feel fairly comfortable on 2018 targets, but investors have already begun looking ahead to 2019.

Without a meaningful return to growth future dividends will remain highly questionable at current levels. Biting the bullet and cutting the dividend to 8p per share would imply an income yield of 6% or so on the current share price and save the company something like £200m a year. It might also finally lift the pall that has dogged the stock for five years.

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Issue Date: 22 Nov 2018