Right now I’m looking at some of the most popular companies in the FTSE 100 to try and establish whether or not they have the potential to return to historic highs.
Today I’m looking at SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) to ascertain if its share price can return to 1,676p.
Initial catalyst
Of course, before we can establish whether or not SSE can return to its all-time high of 1,676p per share, we need to figure out what caused it to reach this level in the first place.
It would appear that SSE reached this level in May of last year, amid a rally in the wider utilities sector as investors sought out rock-solid defensive stocks, amid the global economic uncertainty. In addition, SSE was lifted by buy-out talk in the sector, as the company’s peer, Severn Trent received a take-over offer and investors believed that SSE could also become a target.
This peak of 1,676p was the end of a great run for SSE, which saw its share price outperform the wider FTSE 100 by an impressive 15% in the space of the year preceding this high. However, since reaching its high last year, things have gone against SEE and the company’s share price now sits a full 20% below 1,676p.
But can SSE return to its former glory?
Nevertheless, I feel that SSE can make a return to 1,676p, as at its current level, the company looks undervalued. You see, at 1,676p SSE was trading at a forward P/E of around 13, which is only slightly above its 10-year average P/E of 12.5. But now, after recent declines, SSE currently trades at a forward P/E of 11.5, below its 10-year average valuation.
What’s more, at current levels SSE offers a 6.3% dividend yield, almost double the FTSE 100’s average dividend yield of 3.5%. SSE’s dividend yield is also greater than the utilities sector average of 5.1%. In addition, according to current City forecasts, SSE is in line to offer a 7.1% dividend yield by 2016. It is likely that investors will want to pay a premium for this robust yield, which will in-turn push up the company’s share price.
Still, although SSE’s valuation currently looks low and supports a return to 1,676p, the company is still facing the prospect of further regulation. Indeed, thanks to proposals put forward by Labour leader Ed Miliband, SSE could see the prices that the company is allowed to charge to customers capped for several years.
However, I feel that SSE will be able to ride out this short-term uncertainty and City analysts seem to agree, with earnings forecasts only rising from here on out.
Foolish summary
So overall, based on SSE’s low valuation and rising dividend payout, I feel that the company can return to 1,676p.
