FTSE 100-member SSE’s share price is in freefall! This is what I think you should do

As its share price drops, SSE plc (LON: SSE) could offer improving prospects versus the FTSE 100.

| 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.

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.

Declining FTSE 100 shares are nothing new. After all, the index has fallen by 12% since reaching an all-time high in May 2018. However, the drop in the SSE (LSE: SSE) share price of 21% during the same period is perhaps surprising to some investors. The company has been a popular income share in recent years, with it apparently offering a defensive profile.

The business is experiencing a period of heightened risk, however. As such, its shares have delivered poor performance relative to the wider FTSE 100. Yet there could be turnaround potential ahead. That’s especially the case while a number of stocks, such as a FTSE 250 company which released a disappointing update on Friday, continue to be overpriced in my opinion.

High valuation

The company in question is cloud-enabled end-user and network security specialist Sophos (LSE: SOPH). Its performance in the first nine months of the year has continued to be subdued, with billings growing by just 2% in the period. A further sequential improvement in the renewal rate to existing customers in the third quarter was offset by a modest decline in new billings from new customers, as well as a decline in hardware billings.

Investors reacted negatively to the update. The company’s share price declined by over 20% following its release. This means that in the last year, its share price has dropped by around 55%.

Looking ahead, Sophos is forecast to post a rise in earnings of 17% in the current year, followed by growth of 13% next year. While this is a positive outlook, the stock has a price-to-earnings (P/E) ratio of 37, even after its recent decline. As such, it seems to lack a margin of safety and may be worth avoiding.

Recovery potential

As mentioned, SSE faces a number of risks which appear to have contributed to a decline in its share price in recent months. Perhaps its most pressing challenge is the disappointing financial performance which has been recorded in recent quarters. The company released a profit warning in September, with the impact of a price cap on variable tariffs and poor weather conditions being major contributors. The business is also facing uncertainty in terms of its strategy, with plans to merge its energy supply operations with Npower being scrapped.

While SSE has experienced a disappointing period, it may now appeal to value investors. The stock trades on a P/E ratio of 9.8, which suggests that investors have factored in the potential for further challenges. It has a dividend yield of 7.5%, and is expected to raise shareholder payouts by at least as much as inflation over the medium term.

As such, the income and value potential of the stock seems to be high. Certainly, it may be unable to provide a resilient and robust investment opportunity during what is proving to be a turbulent period for the FTSE 100. But from a recovery perspective, it could deliver high returns over the long term.

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.

Peter Stephens owns shares of SSE. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Smiling white woman holding iPhone with Airpods in ear
Investing Articles

A brilliantly reliable FTSE 100 share I plan to never sell!

This FTSE-quoted share has raised dividends for more than 30 years on the spin! Here's why I plan to hold…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

This 7.7% yielding FTSE 250 stock is up 24% in a year! Have I missed the boat?

When a stock surges, sometimes it can be too late to buy shares and capitalise. Is that the case with…

Read more »

Investing Articles

£13,200 invested in this defensive stock bags me £1K of passive income!

Building a passive income stream is possible and this Fool breaks down one investment in a single stock that could…

Read more »

Investing Articles

I think the Rolls-Royce dividend is coming back – but when?

The Rolls-Royce dividend disappeared in 2020 and has not come back. But with the company performance improving, might it reappear?

Read more »

British Pennies on a Pound Note
Investing Articles

Should I snap up this penny share in March?

Our writer is considering penny shares to buy for his portfolio next month. Does this mining company merit a place…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Stock market bubble – or start of a bull run?

Christopher Ruane considers whether the surging NVIDIA share price could be symptomatic of a wider stock market bubble forming.

Read more »

Investing Articles

Buying 8,254 Aviva shares in an empty ISA would give me a £1,370 income in year one

Harvey Jones is tempted to add Aviva shares to his Stocks and Shares ISA this year. Today’s 7.37% yield isn't…

Read more »

Investing Articles

Is the tide turning for bank shares?

Bank shares are trading on stubbornly cheap-looking valuations yet business performance in the sector is broadly robust. Should our writer…

Read more »