Is SSE’s 7% dividend yield safe?

When I last wrote about SSE (LSE: SSE) in October 2018, the firm was planning the demerger of its household energy business, which it proposed to merge with Innogy SE’s retail energy business npower Ltd. I thought it was a good idea for SSE to get shot of its troublesome retail business because it often seemed ‘hit and miss’ whether the division would make enough money from year to year.

But the deal is off. In December, SSE announced the directors had realised the spin-off and merger would likely struggle as an independent enterprise and it was not, therefore, “in the best interests of customers, employees or shareholders to proceed with the transaction.” Indeed, SSE and Innogy SE were unable to reach agreement on revised commercial terms anyway, so that’s that.

A disposal is still on the back burner

SSE is stuck with its retail arm for now, but the company hasn’t given up on the idea of getting rid of it. Work to separate SSE Energy Services from the firm’s other operations will continue while the directors consider other options for the disposal of the division.

Meanwhile, the share price has been weak for more than two years, which has led to the high dividend yield we see today. Trading has been difficult across most of the company’s operations and we can see the effect of that in the firm’s financial record:

Operating cash flow has been on a downward trend and the firm’s net debt has been rising. I think both measures have been moving in the wrong direction to support a progressive dividend policy. The trends need to reverse at some point if the dividend is to keep rising every year in the future.

Struggling to raise the dividend

Indeed, the company has been struggling to raise the dividend much, which isn’t surprising given that support from earnings has been slight. Earnings are struggling to cover the dividend payments and I’m keen to see the actual figures for the trading year to March 2019 when they are released, which should be around May.

The directors plan to trim the dividend and City analysts following the firm have pencilled in a decrease down to around 80p for the year to March 2020, which is what I used to calculate the 7% forward yield in this article’s headline. The cutting adds to my conviction that the yield may not be safe after that.

I think SSE’s business is in a state of flux and several of its divisions have endured a rocky ride lately. If I held the shares I’d be nervous about receiving the next set of results and believe there are better dividend-paying companies than this one.