A FTSE 100 UK renewable stock with promise. Are SSE shares a strategic investment?

SSE is a renewables-focused FTSE 100 dividend stock on a growth trajectory in the UK. In an increasingly eco-friendly climate, is this a good investment for me?

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FTSE 100 energy stock SSE (LSE:SSE) appears to me to be emerging from the pandemic in better shape than its competitors. Since selling off its retail division, it’s been free to focus its efforts on its utility networks and renewables. Its networking division gives it a reliable income stream that provides a consistent dividend yield to investors. Meanwhile, its renewables division is operating in one of the hottest sectors of the century. SSE aims to triple its renewable energy output by 2030. I think this all makes growth very likely, so would I buy? Before I answer that, let’s look at the business.

SSE shares steady

In its Q3 trading update to December 31, SSE said it expects full-year adjusted earnings per share to come in between 85p and 90p. Based on this figure, its current price-to-earnings ratio (P/E) is around 17. With a projected full-year dividend of 80p per share, this amounts to a 5% dividend yield for shareholders.

The SSE share price has risen 7% in the past five years, although during this time, it’s seen considerable peaks and troughs. The FTSE 100 company is now in the middle of a divestment programme to shed £2bn of assets that don’t fit its green energy focus. Now that its retail unit has been sold off, the board hopes it can move towards a more stable and profitable future. With this in mind, it’s committed to a five-year plan to invest £7.5bn in projects such as the Viking wind farm in Shetland. And it’s in the running for a Danish wind farm too.

Powering past the pandemic

For the £15bn company headquartered in Scotland, Covid-19 understandably poses problems. SSE expects the pandemic will reduce profits by £150m-£250m. Lockdowns have decreased the demand for energy across the board. This has been obvious in oil and gas, but it’s true of renewable energy too. With less industry in operation, it reduces the requirement for electricity. The company has had to adjust to home-working and safe working practices, which ultimately cost it money.

However, in comparison to its peers, the stock appears to have fared better than most. While the share price is hovering around its pre-pandemic range, most rival shares have fallen. Centrica is down 40% in the past year, National Grid‘s share price is down 14% and Severn Trent is down 8%.

Green energy initiatives

Globally, governments are bringing in green initiatives and climate change policies. This is vital to meeting targets in the Paris climate change agreement, and SSE is in a prime position to benefit from this exposure as it expands its clean energy ability. However, it’s not a free ride to a lucrative future. Competition is rising in the sector and many companies are making inroads to bring their products and technologies to market. Oil majors globally are putting vast sums of money into the sector and have the expertise at their fingertips.

Yet I think a 5% dividend yield is hard to beat and with green energy such a big deal just now, I feel that having exposure to renewables in my portfolio is a strategic move. As a long-term investment, I think SSE seems a good UK share to buy. But I already own shares of BP and Shell so I won’t buy for now. I’m focusing on diversifying into other sectors.

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.

Kirsteen owns shares of BP and Royal Dutch Shell B. 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.

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