At first glance, shares in FTSE 100 utility provider SSE (LSE: SSE) might look attractive from an income perspective.
Indeed, the shares will tell you they currently support a dividend yield of 8.4%, although management is planning to reduce the payout in 2020 by around 20%. After taking this reduction into account, the shares are set to yield 6.9% for 2020. However, I don’t think this will be the last time the company will have to cut its dividend payout.
Dividend cut
Even after reducing its 2020 dividend, SSE’s payout will still only be covered 1.2 times by earnings per share which, in my opinion, isn’t enough to both maintain the distribution, reinvest in the business, and pay down debt.
As I have covered before, SSE’s net debt has nearly doubled over the past six years as the company has struggled to maintain its dividend and reinvest in the business. As a result, management doesn’t have much financial flexibility, and a significant drop in earnings per share may force further dividend cuts.
With this being the case, I think there are better places to invest your money if you’re looking for income. Although SSE might not have to cut its payout again in the near term, I don’t think it’s worth taking the risk because another cut may cause the shares to lurch lower. That risk isn’t worth the 7% reward, in my opinion.
Explosive growth
Instead of SSE, I think Impax Asset Management (LSE: IPX) could be a good fit for any portfolio. Unlike SSE, which is shackled by regulation and debt, Impax has a cash-rich balance sheet and is attracting hundreds of millions of dollars in client cash to its offering.
Today, the company reported a 15% increase in assets under management for the quarter ending 31 March to $17.3bn.
Impax’s selling point is a focus on sustainable market themes. The company’s mission statement declares the firm is looking to produce “risk-adjusted investment returns from opportunities arising from the transition to a more sustainable economy.“
By focusing on this rapidly expanding section of the asset management industry, Impax’s profits and assets under management have exploded, even as so many other asset managers have been struggling to attract client funds.
In 2013, the company printed earnings per share of 2.4p. Analysts expect this figure to hit 10.7p for 2019 and 13p for 2020. These estimates put the stock on a forward P/E of 22 and 18.1, respectively.
Dividend growth
As well as this explosive earnings growth, Impax has also rewarded investors with substantial dividend increases since 2013. Analysts are expecting the company to distribute 4.4p per share this year, up from just 0.9p for 2013. If earnings continue to expand at the rate they’ve done over the past six years, I see no reason why this dividend growth cannot continue.
So, while Impax might not look like the market’s most attractive income investment today (the dividend yield is a measly 2%), I think the stock has real potential to grow the dividend substantially from current levels.
