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Why SSE PLC Should Be A Winner This Year

centrica / sse

Shares in SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) have slipped by 5% over the past 12 months, to 1,347p — and they’re down nearly 20% since last summer’s highs of 1,676p.

Political threats to cap energy prices have hurt the sector, but companies like SSE have to also face the fact that people really are trying to cut back on energy use and consumption is falling. For the year ending March 2013, revenue fell despite rising energy prices, although for the six months to September 2013 it was back up a bit.

What does SSE’s record of earnings and dividends look like? Here’s the past five years, with three years of forecasts:

Mar EPS Change P/E Dividend Change Yield Cover
2009 108.0p +2% 10.3 66.0p 6.0% 1.6x
2010 110.2p +2% 10.0 70.0p +6.1% 6.4% 1.6x
2011 112.3p +2% 11.2 75.0p +7.1% 5.9% 1.5x
2012 112.7p 0% 11.8 80.1p +6.8% 6.0% 1.4x
2013 118.0p +5% 12.6 84.2p +5.1% 5.7% 1.4x
2014* 118.7p +1% 11.3 87.7p +4.2% 6.7% 1.4x
2015* 123.4p +4% 10.9 91.2p +4.0% 7.0% 1.4x
2016* 124.3p +1% 10.8 94.9p +4.1% 7.3% 1.3x

* forecast

The thing that shines out there is that massive dividend yield. Yields of around 7% are either unsustainable, or they indicate an underpriced share — but which is it? Well, I think it could be a bit of both.

Pressure on prices

With an election looming, I think it unlikely that the utilities companies will stick their heads too far above the parapet with big price rises in the coming months — it really would give the politicians more justification for their “greedy utilities” bandwagons and would surely strengthen their appetite for price caps. And then once the election is over, it might be quick freeze time.

So there is surely going to be pressure on margins and on those handsome dividend yields — and I can see a day when above-inflation dividend rises become a thing of the past, or possibly worse.

It’s already in the price

But at the same time, I think there’s room for earnings and dividends to fall a bit, lifting those future P/E multiples and forcing dividend yields down a little — while still leaving the shares attractively priced.

On balance, I think short-term political threats and the fear of falling consumption are currently holding sway over the long term certainty of continuing energy demand and the cash-cow nature of the current oligopoly of suppliers.

Oversold

And on that note, I reckon the shares are oversold and too cheap — and even if the price doesn’t move, the dividends will trounce any savings accounts out there.

Verdict: On for a 2014 recovery!

There aren't many dividend yields as high as SSE's, but there are plenty of other strong and reliable ones out there. The Motley Fool report "How To Create Dividends For Life" with its 5 Golden Rules for Building a Dividend Portfolio will help teach you how to find them.

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> Alan does not own any shares in SSE.