Centrica has slashed the dividend for its 650,000 small shareholders and plans to cut costs and investment after warm weather and falling oil prices reduced annual profits at the owner of British Gas by more than a third.
It is the first time Centrica has cut its dividend since the company was created in 1997, and leaves many individual investors with less income than they had come to expect.
Operating profit at British Gas fell 20% to £823m because of a sharp drop in demand during the warmest year on record. The average customer bill fell by about £100, and the average profit per customer fell by almost £10 to £42.
British Gas lost 368,000 customers last year, ending 2014 with 14.8 million clients. The company reviewed customer numbers at the end of the year and found it had overestimated them by 110,000.
The group reduced its final dividend by 30% to 8.4p a share, to save cash and support the company’s credit rating. The cut to the final payout meant the annual dividend was reduced by 21% to 13.5p.
Iain Conn, who took over as chief executive at the start of this year, said the dividend cut was needed after the two big credit rating agencies, Moody’s and Standard & Poor’s, placed it on a negative outlook. Shares in the group tumbled almost 9% to 257p, the biggest faller on the FTSE.
Conn said:
[The dividend cut] was quite urgent actually. Some of our credit metrics at the end of last year were really quite far below where our current credit rating is and we weren’t able to balance cash going out with cash coming in. Clearly it is a big blow. It was important to be clear.
Centrica has one of the biggest followings of individual investors, with many holding their shares since British Gas was sold off in the “tell Sid” privatisation in 1986.
Keith Bowman, an analyst at Hargreaves Lansdown stockbrokers, said:
For investors, and in the current ultra-low interest rate environment, the cut to the dividend payment is a major blow.
Conn said he would cut exploration and production capital spending by 40% to £650m by 2016, and has launched a group-wide review of costs. He is also closing two power stations at Killingholme and Brigg in Lincolnshire.
He declined to discuss potential job cuts, but said there would be less work for Centrica’s contractors in the North Sea. He said: “We are clearly going to reduce activity in the North Sea with these capital cuts and that activity reduction may well have a knock-on effect.”
Centrica’s adjusted operating profit fell 35% to £1.75bn for the year ended 31 December. Profits at the group’s energy business, which includes gas exploration and production, plunged by 44% to £737m as gas prices fell alongside the cost of oil. The company was also forced to write down the value of exploration, production and power assets by £1.4bn.
Centrica is the latest UK company to be hit by the sharp fall in the price of oil, to which the gas price is linked, since last summer. BP, Royal Dutch Shell and BG Group have all slashed investment spending in recent weeks.
Conn said political uncertainty before May’s general election and a competition inquiry weighed on Centrica’s business last year. Ed Miliband, the Labour leader, has promised to cap household energy bills if his party wins the election.
In an update on its thinking on Wednesday, the Competition and Markets Authority said the big energy providers were capitalising on the inertia of often vulnerable customers to make extra money.
Conn, however, said British Gas had to compete vigorously to hold on to its customers and that its profits were not excessive.
We do take very considerable supply risk and volume risk for 80p a week [British Gas’s weekly profit per customer]
He added that political interventions such as Miliband’s could reduce investment and employment, and that it would be better if the government stayed out of the industry.
Conn said:
Butt out is a strong term but I would say that in my experience when governments intervene in markets it can have unintended consequences. It would be my preference to have a predictable regulatory framework rather than governments saying there will be price cuts or whatever.
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