SSE - Power to the People

SSE: For income investors this seems nice and simple. The nine-month update re-iterates the expectation of a 2014/15 dividend increase of at least RPI inflation, with the same being targeted for 2015/16 and thereafter. At the interims to 30^th September 2014 the dividend was increased by 2.3%, which was the prevailing RPI rate. However the rate in December was 1.6%. With fuel and energy costs still coming down, alongside a supermarket price war, RPI looks set to stay low. A 1.6% rise for the year would see last year’s 86.7p dividend rise to 88.1p. So doing the maths: knocking off the interim of 26.6p gives a final of 61.5p, which is only a skinny 1.3% increase over last year’s final of 60.7p. This may all seem rather hair-splitting though when, at 1517p, an 88.1p dividend is a yield of 5.8%.

However, there are other reasons to be wary. It was a mild Autumn and in the first nine months, domestic customers (whose numbers dropped 4.3% to 8.7m) used less gas (-15.8%) and electricity (-5.6%) per household. Prices to customers are coming down (gas by 4.1% in April), with politicians baying for more. Labour’s price freeze proposal is turning into a price cap rhetoric. It is problematic whether price cuts now would be hauled back if Labour gain power in May. Further, with forward purchase contracts locked in at higher prices and wholesale gas prices dancing to a different tune from oil, margins must look under pressure. SSE are more succinct, calling it a ‘challenging business environment’. Further, as one major regulatory chapter closes with the acceptance of distribution price controls for the next eight years, so a smaller one starts with an inquiry opens over the connections market.

In addition the pile of debt and quasi-debt grows. Company guidance is that it will be around £7.8bn by 31^st March 2015, up £200m yoy. SSE may be a safe asset backed business but that is still some 3.4x net debt to EBITDA. The company is also flagging that eps progression in 2015/16 and 2016/17 is subject to additional risk, when last year’s 86.7p dividend was only covered 1.4x. It is a thin line between a nice high safe dividend being churned out on a high payout ratio and a balance sheet struggling to cope with the demands on it. I am worried that SSE might be straying too close to that line. (Neil Cumming^, 26^th January 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower