It's a Gas
The two, long-ago separated halves of what used to be British Gas have produced contrasting profit figures. Despite attracting a fair share of opprobrium, Centrica (CNA) looks a far better prospect for investors compared to BG Group (BG.).
Centrica has retained the British Gas name as its household supplier subsidiary and is under fire for inflating charges quickly when wholesale energy prices rise, but reacting slowly when prices fall.
Those complaints will cut little ice with shareholders, as British Gas’ operating profits rose strongly in the six months to June, contributing to a 15% increase in Centrica group profits to £1.45 billion. Centrica argues that first half profits were depressed in 2011 by mild weather, though that does not come anywhere near to explaining all of the profits upsurge this year. Gas consumption was up only 3.5% year-on-year while prices were up about 18%.
Whatever the moral merits of British Gas and its parent company, Centrica, this column is about investment. In any case, the upstream oil and gas and power generating businesses did even better, with profits up 28%, so the future of Centrica does not rest solely on ripping off household customers.
The interim dividend is raised 8% from 4.29p to 4.62p and there is a strong implication that the final dividend will rise by a similar percentage. With the shares steady this week around 314-5p, the prospective yield is above 5%. This looks to be a great defensive stock.
I cannot feel the same enthusiasm for BG Group, which has confusingly kept the initials but has nothing to do with British Gas. BG profits fell from $2.25 billion to only $609 million in the three months to the end of June, and were lower even after allowing for a $1.3 billion writedown on assets this time.
While production was higher in the latest quarter, it is likely to be lower at year-end. Investors are rightly concerned that BG needs to raise cash to bring major projects in Brazil, Tanzania and Australia on stream. They are also right to be concerns that heavy investment in US shale gas has helped to produce a glut and consequently lower prices.
BG shares have fallen back sharply this month to roughly 1240p and are down heavily from a 2012 peak. The yield is still only about 1.5%. Given the uncertainties, I really cannot see any attraction.
Morningstar analyst Allen Good wrote a research report this week that analyses BG’s latest quarterly results. Premium members can access the report here. (Not a Premium member? Get instant access to Morningstar research and tools when you take a free 14-day trial.)
People Who Should Know Better – Part 1
Spanish regional president Francisco Alvarez-Cascos says Spain will have to think about leaving the euro rather than being thrown out and accuses the Madrid government of humiliating the nation by touring Europe with a begging bowl.
Cascos has little grasp of reality. It is the regions, with their unsustainable property booms fed by now bankrupt regional banks, that have brought the financially sound central government to its knees.
Further, he seems to be implying that leaving the euro is an alternative to the begging bowl. Spain will still need bailing out whether it quits the euro or not.
Cascos thinks that a 'perverse' monetary system (i.e. the euro) has caused a flight of capital from countries in distress into creditor nations that can borrow at very low rates of interest. Fancy that! Lenders prefer to take their money away from high risk nations where there is a serious danger that they may lose part or all of their investments. They will happily accept a lower return from countries that are not in financial difficulties. That has nothing to do with the euro.
Does Cascos think that this situation would change if the euro broke up? It would surely get far worse. The euro is not the cause of the problem. The longer the euro holds together, the longer the slender hope remains that we will come out of the crisis with considerable damage but without an overwhelming disaster.
People Who Should Know Better – Part 2
Among the many financial institutions that have failed spectacularly stands the Financial Services Authority (FSA). You might think, therefore, that chairman Lord Turner has enough on his plate bringing this unloved institution to its overdue conclusion without finding time to pontificate on financial matters outside his jurisdiction.
Turner, however, pronounces that free banking for those in credit is a flawed system that creates a barrier to new entrants. He also thinks it is not a sound basis for a long-term trust-based relationship between banks and customers.
Curious, then, that since free banking came into being most of the large building societies converted into banks (it wasn't free banking that subsequently caused them to fail) and new banks have been set up by supermarkets and, most recently, Marks & Spencer.
As for trust, we have long discovered that banks cannot be trusted. One would not mind paying for a banking service if we could trust banks to set their charges at fair levels and not force onto us financial products that we do not want, need or have any use for.
With timely confirmation, Lloyds Banking Group (LLOY) has just set aside another £700 million to meet product protection insurance mis-selling, taking the total above £4 billion. If Turner thinks we should be handing more money to these discredited institutions then I am even more convinced that free banking should stay.
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