After The Tory Win, Should You Buy Centrica PLC And SSE PLC?

Is it time to buy SSE PLC (LON: SSE) and Centrica PLC (LON: CNA) now the Conservatives are back in power?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Labour leader Ed Miliband’s pledge to freeze energy bills for 20 months threw a cloud of uncertainty over the future of SSE (LSE: SSE) and Centrica (LSE: CNA). 

But now the Tories are back in power, this uncertainty has disappeared.

However, investors should consider their options carefully before jumping back into the sector.

Facing problems 

The promise of a price freeze under a Labour government was just one of the many major issues facing Centrica. Indeed, the company has been floundering for some years, ever since its international expansion plan fell off the rails. 

Earlier this year the group revealed a net loss of £1bn for fiscal 2014 and slashed its lofty dividend payout by 30%, catching many analysts and investors by surprise.

Utility companies are supposed to be defensive investments, offering stable and predictable dividend payouts. So, it’s no surprise that Centrica’s shares crashed by around 9% on the day the dividend cut was announced. 

What’s more, the group’s debt-to-equity ratio has spiralled out of control over the past 12 months. Centrica’s net-debt-to-equity ratio jumped from 1.1 at the end of fiscal 2013, to 2.3 at the end of fiscal 2014. 

It is common for utilities to have high levels of debt, although a debt-to-equity ratio of 2.3 is concerning. SSE’s net-debt-to-equity ratio stands at around 1.3.

Falling oil price

One of Centrica’s biggest problems is now the weak oil price environment. You see, Centrica’s upstream business is North Sea focused, and the North Sea is one of the most expensive places to produce oil & gas in the world. 

For example, during 2013 it cost Centrica around £23.80 to extract each barrel of oil from its fields in the region. That’s around $38 per barrel. If you include other costs, such as tax and interest payments on debt, there’s not much room for error with the price of oil trading at around $65/bbl.

As a result, Centrica was forced to take a £1.4bn write-down on its oil & gas assets earlier this year. Moreover, the company is planning to slash capital spending by 40% next year after a similar cut this year. 

Slow and steady

Compared to Centrica, SSE is a stronger business. The group has a lower debt ratio, no exposure to the volatile oil industry, and management has stated its commitment to the company’s dividend payout for the next three years. 

SSE’s dividend yield currently stands at 5.3% and the payout is covered one-and-a-half times by earnings per share. The payout is set rise in line with inflation, at around 2% to 3% per annum, over the next three years. 

And now, the threat of a price freeze has disappeared, this payout seems secure. SSE trades at a forward P/E of 13.5. Earnings are set to fall by around 12% over the next three years. 

Analysts believe that Centrica will support a dividend yield of 4.3% this year.

Foolish summary

All in all, the Tory win has removed the cloud of uncertainty hanging over the UK utility industry. However, not all utility providers are created equal. Centrica is still struggling with a high debt pile and volatile earnings from its upstream oil & gas arm, but SSE is powering ahead. 

So, now the Tories are back in power, it could be time to buy SSE for income, although it might be wise to stay away from Centrica.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »