Monday 13 May 2019 10:01 am | Updated: Wednesday 05 June 2019 8:57 am

British Gas owner Centrica ‘may slash dividend’ after challenging start to the year

Analysts warned that a dividend cut is on the horizon at British Gas owner Centrica after several external factors hit performance in the opening months of 2019.

Centrica said that the government’s new energy price cap had dented its figures, including a one-off £70m impact in the first quarter.

It also pointed to the negative impact from warmer-than-usual weather for the time of year, falling natural gas prices in the UK and outages to the Dungeness B and Hunterston B nuclear power stations, which it does not run.

Centrica revealed that it has lost 234,000 energy customers in the UK.

However, the company said a cost programme would still help it reach adjusted operating cash flow targets of £1.8bn to £2bn in the full year of 2019, sending shares up 1.99 per cent to 94.44p.

It expects to reduce its headcount by between 1,500 and 2,000 people over the year to help deliver efficiencies of £250m, and divest £500m in business.

“Good cost control means this update isn’t as bad as it could have been, but with a strategic review now pencilled in, the stage is set for a dividend cut,” said Hargreaves Lansdown analyst George Salmon.

He added: “However unlucky it may feel, the reality is that challenges throughout the group, not least the 234,000 UK home customers that have walked out of the door so far this year, mean a rebased dividend is looking all the more likely. The silver lining is that even if Centrica halved the payout it’d still be paying an above market yield, and there’d probably be room for the dividend to grow from that materially lower base.”

Centrica chief executive Iain Conn has faced criticism over his 44 per cent pay rise last year, which corresponds to around £1 for every one of the 742,000 customers his firm lost in 2018.

The company's shares have this year hit a 20-year low as it faces challenges from the price cap.

This morning he said that operation performance had stayed in line with plans, while external factors challenged the company in the first four months of the year.

“However, we continue to focus on those things we can control and as a result we expect to achieve our 2019 cash flow and net debt targets, while we are making further progress on cost efficiency delivery and on demonstrating margin capture capability. We intend to provide a strategic update regarding our portfolio and prospects at the time of our interim results in July,” Conn said.

Russ Mould, investment director at AJ Bell, said the British giant has “lost its way” and must find a new path to “revive” earnings.

“British Gas used to be a trusted brand – now its reputation has been tarnished by talk of sub-standard customer service and expensive bills,” he warned.

“With so much choice in the energy market, Centrica cannot afford to fail on service and cost which means it is going to have to reinvent itself.

“The company is no doubt working hard to steady its ship and the market certainly likes the sound of a rough plan to cut costs, improve customer service and maintain financial discipline. We should get the full plan in July.”

Ian Forrest, investment research analyst at The Share Centre, added that no mention of a dividend make the stock a medium to high risk.

“Following the profit warning in February, confidence in the group and management was already low and today’s news has done nothing to improve that,” he said.

“The market is expecting a 20% drop in the dividend this year but even that now looks optimistic given the very high prospective yield of 10%. This is a medium to high risk hold for income seekers only.”