Few investors will have breathed a bigger sigh of relief at the election result than those holding shares in Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) and SSE (LSE: SSE).
The two utility giants have been under a cloud since Labour leader Ed Miliband pledged to freeze energy bills for 20 months if he were to win the election.
That pledge can now be consigned to history. Instead, Miliband is the one being frozen out.
High Energy
Along with the banks, the utility companies are the big FTSE 100 winners from the election, as the markets look forward to five more years of the Conservatives. Or rather, as they breathe a sigh of relief that we don’t have five uncertain years of minority government or unstable coalition.
While the FTSE 100 is up 1.74% as I write, British Gas owner Centrica has leapt 6.84% and SSE is enjoying a 5.54% bounce. In a night of surprises, one of the few certainties was that these companies would sizzle if the country went cold on Miliband.
Bad Business
It’s hard to overestimate the damage the threat of a price freeze has done to both stocks since September 2013.
Centrica fell from a high of nearly 400p and management warned that Miliband’s plans could even put it out of business. Even after today’s early-morning leap, you can still buy it for 282p, or 13.41 times earnings.
SSE wasn’t hit quite as hard by Miliband’s populist pledge, but its share price has gone nowhere for two years, until today. It trades at just 12.67 times earnings.
The Heat Is Still On
Investors shouldn’t celebrate too much, given that ordinary people really are struggling to heat their homes and are left wondering why the much-publicised collapse in energy prices hasn’t fed through to their own bills.
In February, British Gas cut its prices by just 5%. SSE cut its prices by 4.1%, shrinking the average gas bill by just £28 a year. So, when the cold weather kicks in this autumn both Centrica and SSE could both find themselves in political hot water again.
They have other problems, too. Moody’s downgraded Centrica in March due to “lower energy prices and generally poor trading conditions”, which have hit its profitability. And that was despite Centrica cutting its dividend by 30% in the wake of a 35% drop in 2014 operating profits. It is still on a respectable forecast yield of 4.7% for December.
SSE has lost business to independent suppliers as customer dissolution over high energy prices persuaded more to switch. It may struggle to deliver meaningful growth, but at least management has pledged to increase its dividend, currently a juicy 5.20%, by RPI.
Both companies face challenges, but investors will feel more confident about their ability to tackle them now that a great weight has been lifted off their shoulders.
