Shares in Centrica have fallen nearly 20% after the company slashed its dividend and announced that their CEO, Iain Conn, is to step down from the role next year. The company has made a loss of nearly £500m in the last six months and has seen its shares decline an eye-watering 70% since Iain took over.
Personally, I’ve never been a fan of Conn, as name aside, he’s clearly been reigning over a precipitously awful strategy that’s seen hundreds of thousands of customers walk away from the firm. Earnings have collapsed, the dividend has been slashed, and frankly, whatever Iain thought he was doing, it clearly hasn’t worked.
Earlier this year, Centrica announced that it intends to sell off its oil and gas exploration division in an attempt to focus more on its consumer side of the business (selling it to the likes of you and I). Whilst on the face of it, this might sound like a company retrenching to focus on its core value proposition, I believe it’s wasted millions of pounds in the venture and is now scurrying back to a business facing a government enforced price cap that is throttling the market (have you noticed how many energy companies have gone out of business in the last few years?).
On future cashflows, you could argue that Carillion is worth somewhere between 90-110p a share, which on a current valuation of about 75p looks way undervalued. Having said that, with a Corbyn shadow cabinet sniffing around nationalisation (good luck getting any money out of THEM for your shares), customers marching away in droves, a forecast decline of 10% in future earnings over the next twelve months, and an operating margin of 2-3%, I think it’s highly difficult to accurately predict anything other than continued decline for the company.
As a previous shareholder in Centrica, I have to admit that I’m not entirely surprised by this news. Having sold the last of my shares in the company earlier this year, I remain unconvinced by the company’s long-term potential. Whilst I don’t think this means that they’re about to go bankrupt tomorrow, that isn’t exactly a compelling reason to invest in them.
Ultimately, I fear that an awful lot of these larger, established blue-chip companies are probably a lot less sound than traditional investment gurus would have you believe. The retail sector is a good example of an industry that’s suffering from chronic under investment and a bloated decision-making process that causes younger, nimbler competitors to knock them out of the game and I believe that logic can be applied to a few others sectors such as banking, energy and construction as well. Simply pouring your money into an investment because “they’ve been around forever” isn’t exactly a sensible option (as demonstrated by Centrica).