Friday tips round-up: Centrica, Babcock

There are far too many sources of uncertainty around integrated energy company Centrica right now. The company’s businesses have been hit by warm weather and declining oil and gas prices. An improvement can be expected next year, but it will be largely offset by a change in the tax regime governing its upstream activities. The firm not only seeks gas in the North Sea, it also provides electricity to its customers and services the boilers.

Analysts have thus now turned nervous regarding the outlook for the firm’s profits next year. That is a risk for the 6% dividend yield which the stock now offers. If one adds Labour’s possible tariff freeze and a competition inquiry into the mix then that suggests the shares are best avoided for now, writes The Times’s Tempus.

Engineering contractor Babcock is a quality company but its recent acquisition of Avincis, which provides air ambulances and police helicopters, means that the business model is changing. Operating helicopters is a more capital intensive line of work than providing engineers to the Royal Navy. As well, the purchase came with a lot of debt.

Indeed, net debt stood at £1.28bn in September versus £521m a year ago. Combined that meant that while profits were much higher free cash flow actually fell to £57.5m in the first half from £64.9m in the same period last year. In turn, that means that a part of the dividend for the first six months of the year was financed through increased debt, never a good sign, The Daily Telegraph’s Questor team believes.