I’m shopping for shares right now, should I pop utility giant SSE (LSE: SSE) into my basket?
Our friend electric
Last time I looked closely at energy company SSE, in October, I described it as a “dull, safe, plodding ruminant redeemed only by its tasty yield”, more of a FTSE sheep than a wolf. That was a recommendation, by the way. Trading at 12.3 times earnings and yielding 5.7%, I suggested it was a good way to underpin your portfolio’s animal spirits. Would I buy it today?
In terms of share price, SSE is definitely a plodder. It has risen 11% over the past 12 months, trailing the FTSE 100 at 15%. It is up 35% over three years, against 28% for the index, yet trails over five years. This is more likely to reassure investors than scare them away, because with some stocks, it is nice to know exactly what you are getting, which in this case is income. SSE currently yields 5.3%, against an average 3.55% for the FTSE 100. It is on a forecast yield of 5.6%, more than 11 times base rate, which if new Bank of England boss Mark Carney has any say, won’t be rising any time soon.
Power play
Yet utility companies aren’t as safe as they seem. This is a heavily regulated industry, and the penalties can be severe. In April, Ofgem slapped a record £10.5m penalty on SSE for “prolonged and extensive” mis-selling of gas and electricity. Utility companies are also under political pressure, thanks to rising energy bills, although that didn’t stop SSE from raising its prices 9% in October, and warning of further hikes to come.
SSE’s adjusted profits rose a steady 5.6% to £1.41bn in the year to 31 March. More cold winters will help. Management hiked the full-year dividend 5.1% to 84.2p per share, continuing its unbroken record of annual increases, and is targeting annual increases above RPI inflation in 2013/14 and beyond. SSE is on a forecast earnings per share (EPS) of £1.17 in the year to March 2014, which means it trades at 13.6 times earnings, slightly above the FTSE 100 average of 12.9 times. EPS growth should be flat this year, rising to 6% in the year to March 2015, when the yield is a forecast 5.8%.
UBS says yes
SSE has its fans. Investment bank UBS has recently popped it onto its “most preferred pan-European utilities” list, praising its regulated networks, renewables exposure, attractive dividend policy, structural earnings growth and risk-adjusted valuation, and rating it a ‘buy’ with a target price of £16.30. Given current low interest rates, how could it be anything else?
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> Harvey doesn’t own any stock mentioned in this article
