The Hidden Nasty In SSE PLC’s Latest Results

SSE PLC (LON:SSE) shareholders could be heading for a dividend cut, says Roland Head.

| 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.

SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) investors have seen the value of their shares fall by 15% since they peaked in May last year, including a sickening lurch lower in September, when Labour leader Ed Miliband threatened to freeze energy prices if he came to power.

SSE’s share price is beginning to recover, but I believe that SSE shareholders should be concerned about the long-term sustainability of the utility’s legendary dividend, which has grown ahead of inflation every year since 1999.

centrica / sseLess gas, please

The first thing you need to know is that energy consumption is falling in the UK. In its latest interim results, SSE reported that during the first nine months of 2013, average gas consumption per customer fell by 9.5%, while electricity consumption fell by 4.3%, compared to 2012.

In fact, this is just the latest instalment in a long-running trend. Earlier this year, the energy regulator, Ofgem, cut its typical household consumption values by 18% for gas, and by 3% for electricity.

The main reason that SSE has been able to report rising revenues and profits for so long is that it like its peers, it has increased prices to compensate for falling consumption. If consumption continues to fall, and prices are frozen, SSE’s cash flow could soon fall short of what’s needed to keep the dividend juggernaut rolling.

Dividend numbers don’t add up

Over the last 12 months, SSE’s free cash flow — its surplus cash after capital expenditure, tax and interest payments — was just £3.3m. During the same period, SSE paid £709.5m in dividends to shareholders.

This isn’t unusual, either — SSE’s dividend has only been covered by free cash flow once since 2008. Although the firm still has £1,776m in retained profits which can be used to fund future dividends, this is an accounting figure. SSE has less than £500m in actual cash, so to pay future dividends, the company is going to have to continue drawing on new debt.

This might not be a problem if energy consumption was rising, but if consumption keeps falling and the government decides to cap on energy price rise, then SSE’s profit margins could shrink rapidly, threatening the safety of its dividend payment.

SSE’s prospective yield has now risen above 6%, and I believe this very high forecast yield indicates that the market is pricing the possibility of a dividend cut in the next 12-18 months.

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.

Roland owns shares in SSE.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

3 UK stocks I reckon could benefit from the upcoming general election

As the general election hurtles towards us, this Fool wonders which UK stocks could benefit, and focuses on three picks…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

At 11%, this dividend share pays the biggest yield in the FTSE 100

When a dividend share offers a big yield, we need to be cautious of the risks. But I reckon this…

Read more »

British Isles on nautical map
Investing Articles

I reckon Hiscox shares could be one of the best bargains on the FTSE

I've been investing in FTSE companies for years, but after a major decline I've not seen a company with as…

Read more »

Grey Number 4 Stencil on Yellow Concrete Wall
Investing Articles

4 reasons I’d still buy National Grid shares in a heartbeat despite the recent wobble!

As National Grid shares plunged on the news of a right issue, I’m not flinching, and reckon it's a top…

Read more »

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

After gaining 45% in 12 months, is the Amazon share price now overvalued?

Our author thinks the Amazon share price might be too high. While the long-term future of the business looks bright,…

Read more »

Investing Articles

2 hot dividend stocks I’d buy and hold for 10 years

Our writer reckons these two dividend stocks could help her bag juicy dividends for years to come and explains why.

Read more »

British Pennies on a Pound Note
Investing Articles

2 dividend-paying penny shares I’d happily own

These two penny shares have caught our writer's eye for a combination of income prospects now and business growth potential…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

This FTSE 250 share looks like a bargain to me!

This FTSE 250 share has seen its price tumble due to chaotic local economic conditions in a key market. But…

Read more »