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Should You Sell SSE PLC After Profit Warning And Buy National Grid plc Or Centrica PLC?

Shares in SSE (LSE: SSE) dropped 5% this morning, to 1,510p, after the supplier of energy and telecommunications revealed a 90,000 drop in customer numbers in the three months to the end of June — from 8.58 million to 8.49 million. The firm also warned that for 2015/16, “there will be a decline in operating profit in Energy Supply, compared with the preceding year“.

Is it time to dump SSE and look to rivals National Grid (LSE: NG) and Centrica (LSE: CNA)? Well, even before the latest revelation, SSE was forecast to see earnings per share (EPS) fall by around 10% this year, and the shares were priced accordingly on a forward P/E of about 14.5, so the firm’s Q1 news isn’t really too big a shock.

Upstart competition

And tight times across the industry have been on the cards for some time, as the smaller utilities suppliers continue to take customers away from the so-called big six — the reasons behind SSE’s troubles are sector-wide, and not just of the firm’s own doing. Analysts have a 6% drop in EPS pencilled in for Centrica, and while there’s still a slight rise in EPS predicted for National Grid, it’s only around 1% and it could easily dip negative before March 2016.

SSE offers the biggest dividend of the three, with a predicted yield of 5.6% compared to 5.1% at National Grid and only 4.3% from Centrica. That looks safe for now, after the firm reiterated its target of “an increase in the full-year dividend that will be at least equal to RPI inflation“, and says that it aims to keep on doing the same “for the years beyond 2015/16“.

Cover is tight

But there’s more to a dividend than its yield, as SSE also cautioned today. The problem is, those RPI-busting dividend targets would leave cover a bit short. SSE aims to have the cash payments covered by earnings by around 1.5 times over the long term, but admits that between now and 2017/18 it’s only likely to manage 1.2 to 1.4 times. To compare, National Grid’s next expected full-year dividend would be covered 1.3 times by forecast earnings and Centrica’s 1.5 times, so the three are not too far apart on that score.

And even if SSE does not manage to raise its earnings to achieve 1.5 times cover and it took the drastic step of cutting its dividend to achieve the same end, it would have room to do it and still achieve a yield of 4.9%. On the same basis, National Grid’s yield would drop to 4.7%, leaving SSE’s still the biggest of the three.

Sell? Nah!

I see no need to consider selling here at all. We’re clearly in a bit of a squeeze due to price competition from smaller competitors, and to provide some perspective, SSE’s drop in customer numbers only amounts to 1%. Maintaining dividends in real terms is going to be a very high priority for SSE, National Grid and Centrica, and I’d give all three of them a clear Don’t Panic rating right now.

No, there's certainly no need to abandon utilities stocks as a bedrock of an investment approach that has brought great long-term rewards for a century and more.

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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.