SSE - it could have been so much worse

SSE (SSE.L): It could have been so much worse, couldn’t it? Ed Miliband as Prime Minister, with Ed Balls riding shotgun. A price freeze and/or cuts imposed on the energy utilities. The Competition and Markets Authority (CMA) firing off both barrels, demanding break ups of the big six suppliers and new entrants being favoured. Instead it seems to be almost business as usual barring a gradual tightening of the regulatory regime over successive review periods. A broadly business friendly Tory Government is ensconced and Labour is in turmoil as it seeks both a new leader and a new direction. The CMA has produced a list of proposed remedies, but came up well short of trying to re-write the industry landscape. In this first quarter trading statement (to 30^th June) SSE reported a 10.5% increase in gas- and oil-fired output, although a weak market saw the smaller coal-fired segment collapse by 77%. Some of this drop was clawed back by a 36% jump in renewable output. Retail customer numbers edged back further, from 8.58m to 8.49m. The group has re-iterated its minimum 115p eps forecast for FY2016 and that the annual dividend should be increased by at least RPI. Over the longer term they want to continue RPI-plus dividend increases, whilst noting that their long term dividend cover ratio target of 1.5x, is more likely to be 1.2x to 1.4x in this and the subsequent two financial years.

Back in January, when the shares were 1517p, I felt that the political and CMA risks were too high to make the shares attractive. In addition the balance sheet does carry a lot of debt, but that can be just about justified at a low risk utility. Having gone XD today, the share price on my screen is back at 1517p. On 115p of eps that is a PE of 13.2x and a 90.5p dividend would equate to a yield of 6.0%. In a low inflation environment, nominal growth at SSE will be mundane, but as a high yielding inflation hedge, the stock once again has its attractions. Utilities won’t be everyone’s cup of tea in a rising interest rate environment, but having been on the sidelines, I would now put a few back into portfolios. (Neil Cumming^, 23^rd July 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