Following Centrica's announcement that the company will be cutting their dividend by 30% we are lowering our fair value estimate to £3.40 per share from £3.70 per share. The company also revealed disappointing results for 2014 and that they would be cutting future capital expenditures. Our narrow moat and stable moat trend ratings are unchanged.
Centrica's new chief executive Iain Conn, who has been on the job for only seven weeks, indicated the dividend reduction was a reluctant but necessary move in order to preserve Centrica's strong credit ratings. Credit ratings are important to Centrica because of the significant collateral that must be provided to hedge its large retail energy operations in the United Kingdom and the United States. The 2014 final dividend, payable in mid-2015 following the annual meeting, will result in a full-year 2014 dividend of 13.5p per share versus the 2013 full-year dividend of 17p per share.
Centrica (CNA) has not provided earnings guidance other than stating that it expected 2015 earnings to be lower than 2014. Based on these comments and incorporating current forward energy prices, we will also reduce our 2015 EPS estimate to 16p per share from 24p per share.
In addition to preserving cash, we also suspect the dramatic reduction in E&P investments could be due to Conn taking a fresh look at Centrica's strategy of hedging its retail natural gas sales in the U.K. and U.S. with its own assets. This strategy required Centrica to step up its E&P investments to over £1 billion in 2013 and 2014, representing over two thirds of capital expenditures.