Today I’m assessing electricity provider SSE’s (LSE: SSE) (NASDAQOTH: SSEZY.US) earnings prospects for the next 12 months.
Political strife jeopardises earnings growth
The long-term profitability of the UK’s biggest electricity suppliers has come under escalating scrutiny in recent months. Labour, which started the debate over astronomical utility bills in autumn by proposing price freezes from 2015, switched the heat up another notch recently by claiming that the country’s ‘Big Six’ providers are paying £4bn on top of the market rate as they seek to soup-up profits from their own power-generating facilities.
This latest claim comes after a spate of price increases by the likes of SSE, which said increased tariffs are required partly in response to escalating wholesale prices, and which hiked its own prices by 8.2% in November. Now that the rhetoric over corporate greed has stepped up, and Labour has called for “a complete overhaul of our energy market” and a break-up of the country’s energy firms, the political backdrop is becoming a lot more difficult for the energy firms to operate against.
I believe that the influence, not to mention the willingness, of those in power to rattle the energy firms is actually rather limited, as profits need to keep rolling in order to keep investment in the power grid rolling. Still, as the bad headlines look set to plague the firms well into 2014 and beyond, SSE and its peers may be forced to consider the fallout of future price increases. This could significantly whack their earnings potential looking ahead, particularly as heavy expenditure in upgrading the electricity network is still required to tick higher.
City analysts expect SSE to punch flat earnings growth during the year concluding March 2014, at around 118p per share. But earnings are expected to pick up during the following 12-month period to 125.2p, a 6% increase.
Such projections leave the electricity giant dealing on P/E readouts of 11.6 and 10.9 for these years, outstripping Centrica’s prospective readout of 12.8. Still, for investors concerned about the future profitability of these firms — not to mention consequent ramifications for the share price — the business of utilities may be best avoided, at least until the printing presses cool down.
Due to their ability to generally safeguard earnings, utilities providers are favoured picks for those seeking reliable dividend growth. In line with this, SSE is expected to build last year’s dividend of 84.2p per share to 87.9p and 91.7p in 2014 and 2015 respectively, resulting in colossal yields of 6.4% and 6.7% respectively. These figures smash the FTSE 100 forward average of 3.2%.
