Centrica PLC vs SSE PLC: Which Utility Should You Buy?

Is Centrica PLC (LON: CNA) or SSE PLC (LON: SSE) the more appealing utility at the present time?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Over the last year, shares in Centrica (LSE: CNA) have been a huge disappointment. That’s because they have fallen by 21% and, even worse, Centrica has rebased its dividend to a level that is 30% lower than where it was previously. As such, the total return from Centrica’s shares has been rather poor.

A Challenging Period

Of course, this is perhaps to be expected. Centrica’s business is not solely one of domestic energy supply (it accounts for around two thirds of the company). In fact, Centrica remains a sizeable exploration play and, with the price of oil and gas having come under severe pressure since the summer of last year, investor sentiment for resources companies has declined. As such, Centrica’s share price has been hit hard.

In addition, Centrica and stable mate, SSE (LSE: SSE), have seen their share prices also come under pressure due to the political uncertainty surrounding the General Election. There were fears that a Labour victory would cause a price freeze and tougher new regulator and, since the Conservative victory, both companies’ shares are up due to this not being the case.

Looking Ahead

Clearly, Centrica’s bottom line is likely to remain more volatile than that of SSE as a result of continued uncertainty regarding the price of oil and gas. Looking ahead, however, both companies are expected to increase their earnings next year, with growth of 3% being forecast for Centrica, while SSE is due to post a rise of 6% in its net profit. While neither figure is particularly impressive, such performance is likely to be welcomed by investors that have endured a challenging period for both companies.

Income Prospects

While Centrica and SSE have many similarities, as outlined above, their income prospects is what really separates them. For example, while Centrica yields considerably more than the FTSE 100, with it having a yield of 4.5% versus around 3.5% for the wider index, SSE is among the highest yielding stocks in the index, with a yield of 5.7%. And, looking ahead, SSE is set to almost match Centrica’s dividend growth rate next year, with dividends per share forecast to rise by 2.7% versus 3% for Centrica, thereby maintaining SSE’s income appeal on a relative basis throughout 2015 and 2016.

Strategy

Although the two companies have very similar valuations, with SSE having a price to earnings (P/E) ratio of 14.5 versus 14.7 for Centrica, the former’s better earnings outlook and greater consistency should provide it with more appeal for investors. Furthermore, Centrica is in the midst of making major changes to its business model, with a new management team likely to overhaul the future direction of the business. While this could be a positive in the long run, Centrica’s performance in the short to medium term could include greater volatility than that of SSE. This is perhaps best evidenced by the two companies’ betas, with Centrica’s beta of 1.1 indicating greater volatility than SSE’s beta of 0.8.

As such, for investors seeking a more defensive business model, lower volatility, a higher yield and improved growth prospects for 2016, SSE seems to be the better choice at the present time.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of Centrica and SSE. 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.

More on Investing Articles

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »