Further to my recent post on sell disciplines we have had a poor set of results from Centrica today. I'll not go into detail on the figures as I'm sure there will be metres of pixels written about it today.
The key disappointment for an income investor was the slightly unexpected, but not wholly surprising dividend cut of 30%, starting with the final dividend. This meant that the full year dividend was down by around 20% overall to 13.5 pence. This compared to forecasts of a small rise in the dividend for this year to 17.5 pence, although a small 3% or so cut was being forecast for 2015 to 17 pence. So the 30% reduction will take this number down from the forecast 17 pence and this years actual 13.5 pence to around 12 pence. At the pixel time price this morning of around 258 pence this will be a yield of 4.65%. Given the further fall of earnings that they are flagging for the current year I estimate this will leave the earnings cover at about 1.4 to 1.5x still only just about acceptable.
So based on my sell disciplines I would sell it given the dividend cut and the poor outlook for this year plus the heightened political risk over the election. I am pleased to note that this one had a Compound Income Score of 20 (stocks are scored 100 to 0 with 100 being best) yesterday ahead of these numbers putting it just in in the bottom quintile showing that the Compound Income Scores can be a good guide to point you in the direction of better income stocks and away from the weaker ones. Talking of which I updated the Scores again yesterday and added one new column in response to a readers comment on Saturday's video post, where you can see the comment and my reply at the end by clicking comments if that is of interest to you.
So the new column attempts to calculate a sustainable growth rate for each company to compare with their current growth rate and the 5 year compound dividend growth. This is based on the theory of the Plowback ratio which can be used to calculate the sustainable growth rate by multiplying the retention rate by the ROE. If a company is growing faster than this rate then they will need extra finance over and above the retained earnings. For this reason and because ROCE will tend to be lower than ROE I have chosen to use the 5 year average ROCE * retained earnings % to calculate this figure to be conservative and also so it takes into account the current financing arrangements, but you could obviously calculate the ROE based one if you prefer.