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Is SSE the best renewable energy stock?

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Windmills for electric power production.
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Is SSE (LSE: SSE) the best renewable energy stock? It’s certainly one of the biggest. It also has clear green credentials given its massive involvement in UK wind power and other renewables. Shorter term, it could also be boosted by the involvement of activist investor Elliott Management, which is said to be pushing for a separation of the energy group’s renewables business. Recently that has nudged the share price higher, in what has otherwise been a pretty weak month for the FTSE 100.

SSE and renewables

SSE is a UK-listed energy group focused on regulated electricity networks and renewable sources of electricity. It has a strategy, developed over a number of years, to be a strong part of the transition to net zero. It’s seeking to do this by developing, operating, and owning green infrastructure, so wind farms and so forth. 

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It has the largest renewable energy portfolio in Britain and Ireland. Its portfolio of renewable assets includes the world’s largest offshore wind farm at Dogger Bank, Scotland’s deepest offshore wind farm at Seagreen, and one of Europe’s largest onshore wind farms at Viking. So it’s the real deal! No greenwashing here. It’s well ahead of the oil majors like BP in transitioning its business model. It even sold its residential energy business to Ovo Energy to concentrate on renewables.

Is it the best renewable energy stock?

So there’s no doubt to me about its green credentials. That could see SSE attract investment looking for strong environmental credentials. With the rise of ESG investing (investing focused on being socially and environmentally friendly) that’s distinctly possible.

Then there’s the dividend. SSE has historically been a high dividend payer. It currently yields about 5%, which is well above the FTSE 100 average. The problem is that dividend cover has often been low and that remains the case.

With other renewables businesses trading on much higher valuations, SSE is perhaps being punished because a) it’s in the sluggish FTSE 100 and b) it used to provide electricity to consumers, which was a low margin business. There’s the possibility that as a leaner renewables-focused group now, SSE should get a rating more in line with other renewables stocks. If, or when, that happens it could put a rocket under the share price.

Combining the growth potential of renewables with the steady cash flow from its regulated networks business makes SSE a different renewable energy stock from most. It’s much more steady, and personally I think that makes it a better investment. Sometimes boring is better!  

With SSE pushing back against any break up of the business (which I happen to think is the right call by management given the long-term potential of the business), I do think it’s one of the best renewable energy stocks listed in the UK. Despite that, I also think there are better UK shares for income and growth. But if the price dropped I may reconsider and buy the shares.

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Andy Ross owns no share mentioned. 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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