Will Centrica slash dividends?

British Gas van
Centrica: travelling a bumpy road to recovery

Finances are tight and payouts are under threat. The gas supplier’s new boss faces some tricky decisions, says Alice Gråhns.

“To be Centrica chief executive requires bulletproof armour,” says Lex in the FT. Regardless of what happens to UK energy prices, the boss can expect “sniping from local media and even the government about excessive tariffs”. Yet the 15% slide in the share price of Britain’s biggest gas supplier, on top of a 60% drop since 2013, “owed far more to events in the US than at home”. The collapse came as Centrica cut its earnings-per-share forecast for the year to December to 12.5p – markets had been hoping for closer to 15p.

While headlines focused on the loss of 823,000 retail customers in the UK, the real problem lay with the division of Centrica that sells energy to businesses in North America. That business contributed £220m to pre-tax profits last year, making it the second-biggest earner in the group. But this year that’s going to fall to just £80m. The unit is being squeezed by tougher competition than expected, and a one-off loss relating to billing errors, dating back four years.

Yet while many of the defecting domestic customers appear to have been low-margin accounts that Centrica reckons it can afford to lose, chief executive Iain Conn still has “some difficult questions to answer”, says Chris Hughes in Bloomberg Gadfly. Taking all the bad news together, and throwing in the risk of tougher regulation in the UK, Centrica admits it’s possible “that earnings won’t fully cover its dividend at some point”. Conn has already cut the dividend – slashing it by 30% in 2015. Will he be forced to do so again?

Certainly, with the shares now yielding 8.7%, “investors fear the worst”, says Nils Pratley in The Guardian. But for now, the dividend is “clearly safe”. Centrica says cashflow will be “at least” £2bn this year, whereas capital expenditure is capped at £1bn. That leaves room to pay a dividend costing £650m. Yet in per-share terms, the dividend is 12p and earnings will be 12.5p, which is “horribly tight” in terms of dividend cover.

When Conn took the helm in January 2015, the shares topped 280p. “Halving them was not in the script when he… refocused Centrica as an asset-lite ‘customer-facing business’,” says Alistair Osborne in The Times. This was accompanied by selling off UK power stations, exploration assets in Canada and Trinidad & Tobago and getting out of wind power – as well as axeing 5,000 jobs. Conn would insist he’s picked the right strategy. But he “looks to have underestimated both political and market risk, and compounded that with poor execution”. A second dividend cut would cost him his job. “Conn has much to do to prove he’s value for money.”

Third time lucky for Meredith-Time tie-up

“Time beat the clock,” says Jennifer Saba in Breakingviews. After rejecting two earlier attempts, Time – publisher of Fortune and Sports Illustrated, among other magazines – is to be bought by rival Meredith for $2.8bn. “It’s a lucky break because a go-it-alone strategy looked doomed.” Meanwhile, Meredith and its new billionaire backers, industrialists Charles and David Koch, should enjoy big cost savings. Like newspapers, glossy magazines are being squeezed by an advertising slowdown, having spent decades undercharging readers. So in 2014, when Time Warner spun Time out of its studio and TV empire, its fate “was all but sealed”. Loaded with debt, it had “little chance to overcome the forces besieging the industry”. Chief executive Rich Battista tried to put a greater emphasis on online content. But “siphoning money away from Facebook and Google is proving tough” – Time’s digital advertising accounted for only 20% of revenue in the latest quarter.

Meanwhile, Meredith’s profits have risen steadily, on the back of local TV and magazines with tips on pregnancy and home furnishing, says Lex in the FT. The 48% premium to Time’s pre-bid share price is steep, but “not excessive”. Meredith should achieve annual savings of $450m fairly rapidly, and those cuts should fall straight to the bottom line – indeed, they should “more than cover the cost of the takeover”.

City talk

• “We’re supposed to get up in arms about Mike Ashley keeping it in the family at Sports Direct,” says Jim Armitage in the Evening Standard. He put his daughter’s boyfriend in charge of the firm’s property division. Now he wants his brother to get £11m for doing the IT. Investors should shrug it off. Ashley built this business from scratch, owns 61% of the stock and “has always felt it’s his right to run it like a private fiefdom. If you didn’t realise that before you bought the shares, you didn’t do your homework.”

• Thomas Cook’s boss Peter Fankhauser has a very distinctive Swiss accent, notes Matthew Vincent in the FT’s Lombard column. But last week his problem was sounding too much like an an Englishman – that of Andrew Swaffield, the boss of collapsed airline Monarch. Like Monarch, Thomas Cook has seen demand for trips to Turkey fall in favour of surging demand for Spain, putting margins under pressure as Thomas Cook has to keep prices low to be competitive. Yet while the issues are similar to Monarch’s, they are far less critical. The real problem was that Fankhauser “didn’t sound enough like Friedrich Joussen”, his German rival at Tui, who issued a more upbeat quarterly update.

• “After a decade as a renegade company best known for sending its dividends overseas, dumping sewage into the Thames and regularly flooding London’s streets and businesses, Thames Water is pledging to turn over a new leaf,” says Alex Brummer in the Daily Mail. The firm was told it had to change by Jonson Cox, who chairs water regulator Ofwat. Whether new Thames boss Ian Marchant, formerly at energy group SSE, is the right man for the job, “is not entirely clear. In his previous role he was not known for open governance”. Yet his “first gesture” – a move to shut Thames’s Cayman Island subsidiaries – “is a start”.