Centrica dividend fears lead RBC to switch to National Grid

6th Feb 2019 11:23

(Sharecast News) - RBC Capital Markets has slashed its recommendation on Centrica on growing expectations of a dividend cut, but upped its rating on rival utility National Grid.The bank has downgraded the British Gas-owner to 'underperform' from 'outperform', and reduced its price target from 185p to 130p, arguing that a dividend cut was now "inevitable"."The harsher commodity environment, coupled with continued competitive and regulatory pressures in the consumer segments, and a general lack of growth across the business, means that we do not believe that Centrica can hit the pre-requisites on adjusted operating cash flow generation to maintain the 12p per share dividend," it argued."We see most pressure on 2019, and while Centrica may therefore maintain the dividend for 2018, we believe the dividend will have to be reduced in due course."RBC is pencilling an 8p per share dividend for 2019, "with a 75% pay-out ratio thereafter, whilst also removing the dilutive scrip dividend option".The bank's other concerns include a "lack of visible growth" for the FTSE 100 business. "We remain unconvinced that areas such as Connected Home or Distributed Energy and Power will ever be significant earners for the group."Instead, the bank argued, Centrica needed to arrest customer losses in its core retail operations and to continue focusing on costs.RBC was more upbeat about National Grid, however, which it sees as a value play. It increased the target price to 950p from 900p and upped its recommendation to 'outperform' from 'sector perform'."The ability of National Grid to maintain dividends is the key question from investors, following the potential cut in headline returns proposed by [regulator] Ofgem," it said."In our view, National Grid has levers to pull to maintain dividends within the confines of keeping the balance sheet above the 9% threshold of revolving credit facility/net debt."RBC added that strong growth in National Grid's regulated US activities would help offset earnings pressure elsewhere, and that the company was currently the only UK network trading at a discount to regulatory capital value.As at 11.30pm GMT, shares in Centrica were down a little over 2% at 137p while National Grid was largely flat at 844p.