1 new penny stock in the FTSE 100 index! Should I buy?

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The big winner from June’s FTSE 100 reshuffle is penny stock Centrica (LSE: CNA). The energy supplier will regain blue-chip status later this month after spending a couple of years in the mid-cap FTSE 250 index. At 84p, the Centrica share price is up almost 17% in a month and over 60% in one year. On this trajectory, the stock could trade above £1 soon for the first time since 2019.

Let’s explore the outlook for Centrica shares and whether they would make a good addition to my portfolio.

A FTSE 100 promotion

Supported by rising commodity prices, Centrica’s latest financial results look impressive to me. In 2021, adjusted operating profit soared by 112% to £948m. EBITDA rose by 38% to £1,058m on an annual basis.

Granted, 2020 was a loss-making year for the parent company of British Gas, but its core financials have bounced back in strong fashion. What’s more, Centrica stock appears reasonably valued to me with a current price-to-earnings ratio below 8.4.

Macroeconomic conditions remain broadly bullish for Centrica in my view. The ongoing bull market in commodities could lead to sustained improvements in profit margins. Beyond its North Sea oil and gas production assets, the UK’s biggest energy retailer also owns a 20% stake in Britain’s nuclear power plants. Its nuclear arm has delivered “strong” production volumes recently, according to the company’s latest trading statement.

In the immediate future, the penny stock might also benefit from its FTSE 100 relisting. Increased capital flows from institutional funds seeking to replicate the index could boost the company’s liquidity as well as providing short-term support for the Centrica share price.

Risks for Centrica shares

Perhaps the most pressing risk facing Centrica is the government’s introduction of an Energy Profits Levy, often described as a windfall tax. The company will be impacted the government’s 25% tax hike on North Sea oil and gas, alongside energy majors such as BP and Shell.

Chairman Scott Wheway doesn’t see “any scope, or requirement, or necessity for a legal challenge“. However, he recently warned shareholders the policy could harm Centrica’s investment in the UK.

Rising inflation is a further concern. The company has highlighted the increased risk of bad debt charges as consumers struggle through the cost of living crisis. In addition, further price volatility in commodity markets is an uncertainty the business faces.

Finally, Centrica doesn’t look like an attractive stock for dividend investors at present. The company suspended dividend distributions in 2020 and is yet to confirm a reintroduction of dividend payments later this year.

Would I buy this penny stock today?

Centrica shares have some appeal. Plus, the company should be lifted by its return to the FTSE 100 later this month. However, I’m concerned by the lack of dividends and the company’s significant exposure to the UK energy market. It’s less internationally diversified than some Footsie competitors, which could make the windfall tax a particularly acute headwind.

At present, I wouldn’t buy Centrica stock as I see better opportunities in other energy shares. Nonetheless, this is certainly a penny stock to watch. I’ll pay close attention to the interim results due on 28 July to reassess the company’s investment potential for my portfolio.

The post 1 new penny stock in the FTSE 100 index! Should I buy? appeared first on The Motley Fool UK.

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Charlie Carman has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.