With investors getting nervous about the sustainability of the stock market rally it may be time to look at a high-yielding defensive play.
If you're looking for a solid yield with the reasonable probability of capital growth, then Scottish & Southern Energy (LSE: SSE) looks a good long-term bet. It's best to try and buy such quality companies on weakness and the company's share price hasn't half been weak in recent years
Scottish & Southern is the third-largest supplier of electricity and gas in the UK, and the second-largest energy retailer by customers. It supplies electricity and gas under the Southern Electric, Scottish Hydro Electric, SWALEC and Atlantic brands and has over seven million customers.
Future confidence
Last week's results for the first half to the end of September saw a 35.7% increase in adjusted pre-tax profit compared to last year -- though the previous year was an exceptionally weak first half. What was of more interest to investors, though, was the overall tone of confidence. And the company put its money where its mouth is, raising the interim dividend by 6.1% to 21p. Better yet, the company said it's on course for a full-year dividend of "at least" 70p per share and has over £1bn invested in assets under construction to deliver future profits.
This means the shares are yielding at least 6.4% this year -- and the brokers expect this to rise to around 6.72% next year. From what the company told us last week, there seems no reason to assume this won't be maintained; quite the opposite in fact. And there aren't many places you can grab a return like that these days.
Big plans
Scottish & Southern certainly seems to have some big plans for the future -- particularly when it comes to greener energy. It intends to submit a planning application to develop the UK's biggest carbon dioxide capture facility at its Ferrybridge coal-fired power station in Yorkshire.
It's also interested in bidding for Électricité de France SA's (EDF) three UK power distribution grids, valued at around £4 billion, and recently announced a joint venture with Forth Ports to invest £1 billion in biomass power in Scotland. Meanwhile, the power giant is also expanding its onshore and offshore wind generation capabilities. In fact, over 20% of the energy the company generates is now derived from renewable sources.
Relax and enjoy the ride
A lot of this is detail, which may be extremely important if you work for the company or maybe even if you're one of its customers. But for those of us who prefer a reasonably safe high yield and to get on with other more interesting stuff in life, it's not all that important. Our power requirements aren't going away any time soon. Meanwhile, the knowledge that the company is getting ever-greener (whether this is driven by legislation or not) is a soothing balm for those concerned about environmental issues.
Historically, the company has also shown a commendable interest in growing its dividend.
Contrarian value?
As I write, the shares stand at £10.91. This is pretty close to the 52-week low of £10.39 and quite near the lowest it's been for around four years. Go back a couple of years, though, and the shares were north of £16.
A return to that kind of level would reward investors today with a near 50% return. This doesn't look likely to happen any time soon, but there could be a rally in high-yielding utilities as investors nervous about the sustainability of the stock market's mega rally look for safer high-yielding havens. In other words, this could be a short term winner and, if not, it certainly looks like a high-yielding long-term winner -- the kind of thing that has long been popular with Foolish investors.
As with most utilities, though, the downside is the debt level. Gearing stands at around 170%. But this goes with the territory with utilities -- and Scottish & Southern is better than many. All in all, it looks like an excellent choice for the long-term income seekers at the current level.
