If you’d bought shares in energy supplier SSE (LSE; SSE) five years ago, you’d have seen their value rise by only 15% to today’s 1,543p. That’s ahead of the FTSE 100, but it’s nothing to shout about, so why do people rate SSE shares so highly?
The secret, of course, is in the dividend, and SSE has been providing yields of close to 6% per year. For the year just ended in March, SSE has announced a dividend of 89.4p to provide a yield of 5.8% on the current share price, maintaining its policy of lifting its dividend each year by at least RPI inflation.
Adjusted earnings per share dropped by 3.7%, but at 119.5p that was ahead of SSE’s target of 115p. It was enough to cover the dividend 1.34 times, which falls comfortably within the company’s target range of 1.2 to 1.4 times — and SSE says it’s targeting an EPS rise to at least 120p in the current year.
Total return
If you’d bought SSE shares five years ago with the price at 1,340p, in addition to your modest share price gain you’d also have accumulated a total of 429p in dividends, which would take your total return for the period up to 47% — and that is something worth getting excited about.
And with the company’s business being so predictable and its costs and revenues relatively easy to predict, SSE shares are as about close as they can be to offering a guaranteed annual return. If you want steady income, it’s hard to think of a better sector to be in than utilities.
The story is similar at United Utilities (LSE: UU), which provides water services, and is due to report its full-year results on 26 May.
United Utilities shares have actually outperformed SSE over five years, gaining a very respectable 51% to 945p, though at the same time the dividend yields have been a bit lower at under 5% — and while the actual cash has been keeping ahead of inflation, the rising share price has caused the yield to drop, to 4% last year.
Even bigger profits
But the total return? The past five years of dividend cash would have added up to 170p, and with the share price at 629p five years ago, if you’d bought then you’d have accumulated 1,115p per share for a total return of 77%! And remember, that’s by taking the cash — if you’d reinvested your dividends in more United Utilities shares, you’d have done even better.
What does the future hold for United Utilities? The company’s most recent trading update in March told us that things were in line with expectations for the year to March 2016, so current analysts’ forecasts are likely to be pretty close. They’re actually predicting a 10% fall in earnings per share followed by a further 4% dip next, but EPS should start to grow again in the year to March 2018.
That would still be plenty to keep the dividend cash flowing, and rises are still on the cards for the next few years.
