Investors should avoid Centrica shares Centrica 292p Questor says AVOID The Milliband effect Ed Miliband may be struggling to make an impact in the election polls, but he is having a devastating effect on the stock market. Ever since the Labour leader said he would freeze energy prices last year shares in Centrica [LON:CNA], which owns British Gas, have moved sharply lower. The company's shares peaked at 402.2p in September last year and they have slumped 29pc lower since to 293.9p at the end of last week. The utility company was valued at £20.7bn at its height and with Mr Miliband's help it is now down £6.1bn to £14.6bn at the end of last week. It has not all been Mr Milliband's doing, of course. The utility has been hit by milder weather in the UK reducing home gas sales and its oil and gas exploration business is suffering from a sharp fall in the oil price. Brent crude, the global benchmark for oil prices, has entered a bear market falling from $115 per barrel in June to to $78.8 per barrel at the end of last week, a fall of 31pc. Warning on profits The utility company has issued three profit warnings within the past 12 months. Last week, it said that full-year earnings per share (EPS) are now expected to be in the range of 19p to 20p. That figure is 25pc lower than last year's EPS of 26.6p, and below market consensus of 20.7p. The news sent shares down more than 1.6pc last week. Centrica blamed a warm winter in the UK and the fact that the nuclear power business, in which it owns a 20pc stake, was hit by safety shutdowns to the Heysham 1 and Hartlepool nuclear plants. The nuclear restarts have been further delayed since then, while unusually warm weather has persisted. The company has already taken additional costs from an exceptionally harsh winter in the US, where it operates through its Direct Energy subsidiary. The company's British Gas customer gas usage in the first 10 months of the year was 21pc lower than the previous year as a result. Shaky dividend Centrica currently pays a full-year dividend of 17p and that is forecast to increase by 3.5pc to 17.6p by the end of the year. That would see the earnings cover on the dividend, where anything above two times means the dividend is relatively safe, fall to just 1.2 times. One of the options open to companies that want to protect dividend payments when profits fall is to reduce capital expenditure. Centrica is in a particularly difficult position because it cannot simply reduce capital expenditure to maintain the payout. The political pressure on the utility industry is such that under-investment in the nation's energy supply in order to keep shareholders happy is not an option. The debt levels at Centrica are also increasing. Net debt - total debt less cash - increased to £5.2bn at the end of October, up from £5bn at the end of 2013, and £4bn at the end of 2012. Avoid the shares Questor thinks that investors are now exposed to dividend cuts and a falling share price. The company still has some wriggle room before having to cut dividends. First the share buy-back could be ended and it can sell assets to raise money. Centrica announced the disposal of some wind farm assets two weeks ago. However, even if the dividend survives, investors could be exposing themselves to a permanent loss in capital. The value of the shares, or equity, in a debt-laden utility is directly linked to the cost of the debt. As the cost of that debt rises, the value of the equity falls. For the past six years record low borrowing rates have artificially inflated the equity value, and this won't last forever. We warned investors about the threat to the share price back in early May (Avoid, 320p, May 8) and expected a 20pc fall in the share price. The shares are down 7pc since then and we still don't like the prospects. Avoid.