Should I Invest In SSE Plc?

Can SSE plc’s (LON: SSE) total return beat the wider market?

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To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value

If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.

So this series aims to identify appealing FTSE 100 investment opportunities and today I’m looking at SSE (LSE: SSE), the electricity and gas utility company.

With the shares at 1558p, SSE’s market cap. is £15,025 million.

This table summarises the firm’s recent financial record:

Year to March 2009 2010 2011 2012 2013
Revenue (£m) 25,424 21,550 28,334 31,724 28,305
Net cash from operations (£m) (46) 1,689 2,050 1,708 1,977
Adjusted earnings per share 108p 110.2p 112.3p 112.7p 118p
Dividend per share 66p 70p 75p 80.1p 84.2p

At SSE, there’s a firm focus on rewarding investors by delivering what it describes as annual above inflation increases in the dividend. Right now, the forward yield is running at about 5.9%, which suggests that, like most utility companies, income is likely to be the main contributor to investor total returns.

Around 97% of revenue comes from from the UK and 3% from Ireland and, last year, about 54% of operating profit came from moving electricity around the North of Scotland and Southern England via the firm’s distribution and transmission cables. That’s a classic ‘toll bridge’-style operation: SSE owns the cables that run to customers’ premises and therefore collects a fee from the supplier for delivering the energy to the end consumer.

Roughly 32% of operating profit came from electricity and gas supply contracts where SSE  bills the consumer according to an agreed tariff.  The remaining 14% came from gas production, distribution and storage. Meanwhile, the firm’s capital-intensive electricity generating operations, which include renewable and thermal plant in the UK, Ireland and Europe, managed to wipe 32% from the overall operating profit figure by posting a big loss.

Overall, the ‘shape’ of SSE’s business strikes me as being a potentially stable dividend driver, which makes me optimistic about the firm’s total-return prospects from here.

SSE’s total-return potential

Let’s examine five indicators to help judge the quality of the company’s total-return potential:

1. Dividend cover: adjusted earnings covered the recent dividend 1.4 times.  3/5

2. Borrowings: net gearing about 100%. Net interest covered 4.8 times by earnings. 3/5        

3. Growth: robust cash flow supports rising earnings against flat-looking revenue. 4/5

4. Price to earnings: a forward 12 or so seems up with earnings and yield expectations.  3/5

5. Outlook: satisfactory recent trading and an optimistic outlook   3/5

Overall, I score SSE 16 out of 25, which encourages me to believe the firm has potential to out-pace the wider market’s total return, going forward.

Foolish Summary

This is a steady scoring against my quality and value indicators, which underpins the firm’s progressive dividend aspirations. I’m tempted by the shares at this level.

But SSE isn’t the only income-play on my list of potential investments. I’m also weighing up an idea from the Motley Fool’s top value investor, who has discovered what he believes is the best income generating share-play for 2013. He sets out his three-point investing thesis in a report called “The Motley Fool’s Top Income Share For 2013”, which I recommend you download now. For a limited time, the report is free so, to download it immediately, and discover the identity of this dividend-generating star, click here.

> Kevin does not own shares in SSE.

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.

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