The Pros And Cons Of Investing In SSE plc

Stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.

Today I am looking at SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) and assessing whether the positives surrounding the firm’s investment case outweigh the negatives.

Media attention could erode share price

I have long gone on record stating my belief that the hysteria surrounding curbs on electricity firms’ profitability is nothing more than that. Since Labour leader Ed Miliband called for across-the-board price freezes from 2015 back in September, investor confidence in this previously-reliable sector’s earnings-generating capacity has been severely shaken.

Still, regardless of the scant likelihood of regulatory measures to scale back the earnings potential of SSE and its peers, there is no doubting that the prospect of fresh soundbites hitting the newswires from pressure groups and politicians alike could drive share prices significantly lower again. With telecoms giant BT Group through to water provider Thames Water coming under fire in recent weeks over excess charges, the fight against rising household bills in the current climate has legs to run.

Earnings set to climb

But behind the scenes, Westminster’s realises that investment in the nation’s power grid needs to keep rolling, and that a reduction in the profitability of such firms could put this in jeopardy. Indeed, the City’s expectations for earnings to rattle higher over the longer term confirm this view.

SSE is expected to maintain broadly flat earnings performance for the year ending March 2014, at 117.9p per share, although this is expected to rise 6% in the following 12 months to 125.2p. These projections generate P/E ratings of 11.6 and 11 for these years, comfortably below a forward average of 12.5 for rival Centrica.

Retail business under pressure

Still, SSE will have to mount a charm offensive announced in order to offset the bad publicity attributed to its 8.2% average price rise of recent months, not to mention recent mis-selling scandals. Indeed, November’s interims revealed that it lost 60,000 customers during the March-September period.

The electricity play saw adjusted pre-tax profits slipped 11.7% during March-September, to £354m, with its retail arm recording an operating loss of £89.4m during the period. The firm cited “higher wholesale gas, distribution, environmental and social costs“, as well as lower power consumption during the summer, as driving performance lower.

A smashing dividend yield

But for income investors, heavy price weakness in recent months has enhanced the electricity play’s appeal as a bumper dividend stock.

SSE has consistently raised annual dividends for well over a decade, and analysts expect the company to increase last year’s 84.2p per share payout to 87.9p in 2014 and 91.7p in 2015. These figures create gigantic yields of 6.6% and 6.9%, whacking the 3.3% FTSE 100 forward average out of the park. And I believe that investors can look forward to increasingly appetising dividends in coming years as earnings tread higher.

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> Royston owns shares in SSE.