The outcome of the general election in 2015 could have a significant impact upon the share prices of utility companies including Centrica (LSE: CNA) and SSE (LSE: SSE). That’s because Labour leader Ed Miliband has promised to freeze electricity prices and introduce tougher regulations that could mean lower profits for domestic energy suppliers such as SSE and Centrica.
It’s All In The Price
However, this promise is nothing new. Indeed, SSE’s and Centrica’s share prices have had plenty of time to react to the increased political risk and it appears as though the potential challenge to both companies is already priced in. For instance, SSE trades on a price to earnings (P/E) ratio of 13.1 and Centrica currently has a P/E of 13.8 – both of which are below the FTSE 100‘s (FTSEINDICES: ^FTSE) P/E of around 14.
Furthermore, the yields on the two companies seem to indicate shares in SSE and Centrica offer great value at current price levels. That’s because SSE yields 5.6%, while Centrica offers investors a yield of 5.6% — both of which are above and beyond the FTSE 100 yield of 3.3%. As such, it seems as though investors are pricing in the potential for price freezes, which means there could be upside if Labour don’t win the election or are unable to effectively implement their promise. In the meantime, investors are able to tap into index-leading yields that are well covered by profits.
Further Potential
Certainly, there is additional uncertainty at Centrica as it seeks to replace its senior management team. However, where it could also offer upside is due to around one-third of the business being focused upon exploration rather than domestic energy supply. While this can mean more volatile profits than for many of its domestic energy sector peers, it could also provide a fillip for the company, too.
Meanwhile, SSE continues to aim for above-inflation dividend per share increases. While inflation is just 1.5% at present, such an aim provides security over the medium term for income-seeking investors and means that SSE’s shares are an even more attractive income play.
Severn Trent
Of course, Severn Trent (LSE: SVT) is a fellow utility but, unlike SSE and Centrica, provides water services. This industry suffers from far less media exposure and, therefore, less political risk and this means Severn Trent is likely to be more stable than SSE or Centrica in future.
However, this stability seems to come at a hefty price, with Severn Trent currently trading on a P/E of 22.7 and yielding 4.3%. Furthermore, earnings and dividends per share are forecast to fall next year by 14% and 7% respectively. Therefore, while arguably less stable than Severn Trent, SSE and Centrica could be better long term investments.
