2 Reasons Why Investors Should Avoid SSE plc

In recent days I have looked at why I believe SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) is poised to hit the high notes (the original article can be viewed here).

But, of course, the world of investing is never a black and white business — it take a variety of views to make a market, and the actual stock price is the only indisputable factor. With this in mind I have laid out the key factors which could, in fact, cause SSE to tank.

Regulatory pressure looms large

SSE and its peers have figured large in the headlines for some time now, albeit for all the wrong reasons. The effect of rising utility bills, and subsequent public outrage over generous dividend payments, has prompted all political parties to pledge to crack down on the sector.

Indeed, energy secretary Ed Davey’s requested Ofgem to investigate the double-digit margins of gas suppliers last month.

This prompted RBC Capital to note that “the direct attack by Ed Davey highlights the political risk that continues to dominate in the UK, and the direct attack on SSE… is a step up in pressure from the incumbent coalition.”]

centrica / sseAnd just this week consumer watchdog Which? and the Federation of Small Businesses called on the energy regulator to investigate the dominance of the country’s ‘Big Six’ energy providers. These major suppliers control more than nine-tenths of the gas and electricity markets.

I have long argued that Westminster is limited in what it would actually be prepared to do to crack  down on the so-called “excessive” profit making of such firms. But, of course, the pressure of a general election next year, exacerbated by persistent cat-calling from Ed Miliband’s opposition party, means that government action of some sort cannot be completely ruled out.

Given this uncertain backdrop, SSE and its peers may be forced to slash dividend payments in the meantime in a bid to go on the charm offensive and limit the possibility of legislative changes. Investors should also be aware that a fresh newsflow concerning potential regulatory shake-ups could also send share prices spinning lower once again.

Retail operations on the ropes

SSE’s decision to hike average energy prices by 8.2% in October has weighed heavily on SSE’s retail operations in recent months, a situation worsened by the subsequent swathes of bad publicity.

The electricity giant’s January interims revealed that the number of electricity and gas customers on its books in the UK and Ireland toppled to 9.22m during March-December, down from 9.47m in the corresponding 2012 period.

The company will hope its 3.5% price cut announced in January, due to changes in the government’s green levy, will help revitalise its customer base. But SSE has little room to manoeuvre as a backdrop of rising wholesale energy prices eats into margins.

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Royston owns shares in SSE.