Is SSE PLC Still A Buy After The 2013 FTSE Bull Run?

The current 6.3% yield on SSE PLC (LON:SSE) shares is a gift created by political meddling, says Roland Head.

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2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.

Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 8% this year, and is 51% higher than it was five years ago. As Christmas approaches, I’ve been asking whether popular stocks like SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) still offer good value, after five years of market gains.

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Back to basics

Billionaire investor Warren Buffett says that one of the most important lessons he learned from value investing pioneer Ben Graham, is that “price is what you pay, value is what you get”.

SSE’s share price is down by 6.5% on its year-opening price, and is just 14% higher than it was five years ago — although its 14-year track record of above-inflation dividend growth goes some way to compensate for this.

Is the risk of a stagnant share price worth the potential value offered by its high yield, and long track record of dividend growth?

Ratio Value
Trailing twelve month P/E 12.0
Trailing dividend yield 6.3%
Operating margin 4.9%
Net gearing 146%
Price to book ratio 2.5

SSE’s operating margin of 4.9% tends to suggest that utility firms are not as profitable as the general public think they are, and it’s worth remembering that UK utility bills are actually lower than in many European countries.

This helps explain why Labour Leader Ed Miliband’s suggestion that he would impose a price cap on utilities triggered a slide in their share prices earlier this year, and why several utilities, including SSE, have pulled back from proposed investments this year.

Despite this, SSE’s 6.3% yield, backed by regulated revenues, is very attractive, and I’ve recently topped up myself.

What about 2014?

Utility firms such as SSE need a clear long-term understanding of the regulatory regime they will operate under in order to make investment plans and secure appropriate funding. Recent government policy — along with threats by Labour to impose an arbitrary cap on energy prices — haven’t provided this.

In my view, this situation isn’t likely to improve much until after the next general election, in May 2015. However, I think that SSE will weather this short-term uncertainty, and should continue to be a sound income investment. This appears to be a sentiment shared by City analysts, whose latest consensus forecasts show earnings growth for both this year and next:

2014/15 Forecasts Value
Price to earnings (P/E) 10.8
Dividend yield 6.8%
Earnings per share growth 5.9%
P/E  to earnings growth (PEG) 1.6

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