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Why Forecasts Are Up At SSE PLC And United Utilities Group PLC, But Falling At Centrica PLC

With political squeezes in the offing, and no real chance for utilities companies to raise their prices, profit forecasts have been trimmed over the past 12 months.

But things are starting to look up again for SSE (LSE: SSE)(NASDAQOTH: SSEZY.US) as the latest consensus shows earnings expectations for the year ending 31 March edging back up to 116.6p per share — and forecasts for the next two years have pushed up a bit too. If that comes to pass, we’ll be ending the year with a P/E of 13 based on a share price of 1,527p and with a dividend yield of 5.8%.

With the firm’s Q3 trading update in January telling us that things were still in line with guidance given at the halfway stage, we can probably see this valuation as being close to the mark. And with SSE having confirmed that its dividend should rise at least in line with RPI inflation, I reckon it’s a pretty good value income stock right now with some room for capital appreciation.

Safety in water?

Forecasts for United Utilities (LSE: UU)(NASDAQOTH: UUGRY.US), which is largely immune to energy price wrangling, have actually been steadily improving over the past 12 months — from EPS of 45.1p back then to as high as 48.2p today, with an increase coming in the past week as we await end-of-March results. Figures for the next two years have been rerated upwards in line, although we’re still looking at expected drops in earnings in 2016 and 2017.

Dividends are still predicted to grow this year and next, but by less than previously expected. We’d be looking at yields of 4% and above, but with the shares having put on 20% to 933p over the past 12 months, that’s a bit low by the standards of utilities companies. The P/E is still high too, at close to 20 for this year and rising, so it seems City investors are paying a premium for the relative safety of the water business.

Gas going cheap?

Over at Centrica (LSE: CNA), the fallout from February’s dividend cut is still being felt, with brokers continuing to cut back their earnings forecasts for December 2015. A year ago they were forecasting 26.3p per share, and that was gradually cut back to 20.1p a month ago — and even since then we’ve seen further reductions, with EPS of just 18.1p expected now.

How does that affect valuation today? At 258p, the shares are on a forward P/E of 14, which is pretty much bang on the FTSE 100 average, and there’s likely to be a dividend yield of around 4.6% based on a 30% rebasement from 2013’s pre-cut level. So even without anything extra this year, shareholders should still get a dividend significantly above average.

Centrica shares don’t look as cheap as SSE to me, but they still look good for the long term.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.