How Will SSE Plc Fare In 2014?

Should I invest in SSE PLC (LON: SSE) for 2014 and beyond?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

For most shares in the FTSE 100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.

That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.

To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:

Should you invest £1,000 in Rigetti Computing right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Rigetti Computing made the list?

See the 6 stocks

  • Prospects;
  • Risks;
  • Valuation.

Today, I’m looking at electricity and gas utility company SSE (LSE: SSE) (NASDAQOTH: SSEZY.US).

Track record

With the shares at 1339p, SSE’s market cap. is £12,938 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

1) Prospects

The directors of SSE seem determined to remunerate investors with annual above-inflation increases in the dividend. The recent interim results statement revealed a 3.2% dividend uplift, and the firm reckons it has achieved an unbroken record of better-than-inflation dividend-raising stretching back to 1999. That’s a well-engrained tradition that I’m sure no CEO will want to break.

Backing up that dividend is a well-diversified utility business with around 97% of revenue coming from the UK and 3% from Ireland. The firm has electricity distribution operations in the North of Scotland and Southern England; electricity and gas supply contracts; gas production, distribution and storage businesses; and interests in electricity generating assets. Potentially, good financial performance in any one particular business area could help offset poorer performance in another, which could help to support that ongoing progressive dividend policy.

2) Risks

Events recently tested that theory with SSE delivering a 17.4% decline in adjusted earnings per share with the half-time figures. Beneath that headline-number is a mixed operating performance: the energy distribution and transmission operation produced 74% of operating profit with the remaining 26% coming mostly from electricity generation. Meanwhile, retail energy supply delivered an operating loss over the period, and yet the dividend went up.

So, the directors’ determination about the dividend seems robust. I’m more worried about the share price; as ‘defensives’ like SSE tend to move in and out of favour counter-cyclically to economies. When the macro-economic environment seems dire, P/E ratings can expand as investors head for ‘safe’ investments. When general economic circumstances start to look rosy, like now, investors tend to switch to ‘risk-on’ investments, moving away from utilities like SSE, which means the P/E rating often contracts.

The firm reckons trading in the regulated utility sector has been difficult lately. On top of that, the business is highly capital-intensive and relies on debt funding to keep things ticking over. Topping the list of potentially catastrophic outcomes is the possibility of SSE having its credit rating downgraded by the likes of Moodys and Standard & Poors. If that happens, finance could be hard to obtain at an economic price and profits could evaporate altogether, along with the dividend. There’s also a big risk revolving around commodity prices. We’ve already seen how escalating wholesale prices can squeeze the profit from the firm’s retail operation.

3) Valuation

The forward dividend yield for year ending March 2015 is running at about 6.8%, which on the one hand looks good, but on the other hand looks too high: I get nervous when yields approach 7% as such levels often presage a cut.  Analysts following SSE reckon adjusted forward earnings are likely to rise 6%, which means they’ll cover the dividend payout just under 1.4 times.

The forward P/E rating is around 11, which seems to sit well against dividend-yield and earnings-growth expectations.

What now?

I’m one of those investors looking at ‘growthy’ type investments at this point in the cycle so will be unlikely to invest in SSE right now. However, I can see the attraction of the firm’s chunky dividend payout.

Of course, there are plenty of other passive income opportunities to explore. And these may be even more lucrative:

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

> Kevin does not own shares in SSE.

More on Investing Articles

Investing Articles

Up 30% in weeks, does the BAE Systems share price still offer value?

The BAE Systems share price has been on a tear over the past couple of months. This writer sees limited…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Hunting for shares to buy as the market trembles? Remember this!

After a choppy week in global stock markets, our writer goes back to basics in his hunt for bargain shares…

Read more »

Investing Articles

3 simple principles to help build wealth in an ISA

As a new tax year opens up new ISA allowances for many investors, our writer shares a trio of things…

Read more »

Investing Articles

US trade tariffs: what they could mean for UK shares like Ashtead, Compass Group, and Experian

US trade tariffs continue to rock global markets, and the UK is no exception. Our writer considers how a new…

Read more »

Mindful young woman breathing out with closed eyes, calming down in stressful situation, working on computer in modern kitchen.
Dividend Shares

The Trump slump has smashed these FTSE 100 shares!

After a rough week for US and UK shares, investors have been shaken. But now these FTSE 100 stocks have…

Read more »

Investing Articles

£10,000 invested in Rolls-Royce shares 5 years ago is now worth…

Rolls-Royce shares have been on fire since April 2020. Part of this is the result of pandemic restrictions lifting, but…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

£10,000 invested in Tesla stock at its peak in 2024 is now worth…

Over the last few months, Tesla stock has lost nearly half its value. Here, Edward Sheldon explores a few takeaways…

Read more »

Investing Articles

Is the S&P 500 heading for an epic stock market crash?

Our writer shares his thoughts on a very crazy time for the S&P 500 and the wider stock market. How…

Read more »