Investors are probably the last people in Britain who have a kind word to say about the big six utility suppliers. Few people would argue with the usual tabloid description of them as “greedy energy firms”, especially when their gas and electricity bill lands on the doormat.
Investors still speak highly of SSE (LSE: SSE) and British Gas owner Centrica (LSE: CNA) because they pay consistently high dividends while adding defensive stability to a portfolio. With the two firms currently yielding 5.5% and 6% respectively, you can see why they remain in investors’ good books. But that could be set to change.
Earlier this month, Prime Minister Theresa May threatened a huge crackdown on the worst excesses of big six telling the Conservative Spring Forum that “energy is not a luxury, it is a necessity of life” and said the market is not working as it should. May added:
“Prices have risen by 158% over the last 15 years, and ordinary working families are finding that they are spending more and more of their take-home pay on heating and lighting each month.”
That sounds like fighting talk to me.
She could turn out to be all talk and no action, but it certainly casts a shadow over the sector. However, it has done nothing to deter five of the big six from unleashing another round of inflation-busting rate hikes that come into force during March and April.
For example, nPower has increased dual-fuel bills by 9.8%, costing customers on a standard variable tariff £110, while EoN’s 8.8% rise will add £97 to their bills. SSE is holding its gas prices but its 2.8 million electricity customers face an eye-watering 14.9 per cent price hike, costing dual-fuel customers £73 a year. British Gas hasn’t yet increased its bills, but analysts expect it to do so in August. Are they pushing their luck?
We have been here before. Remember former Labour leader Ed Miliband’s proposed 20-month utility price freeze, first announced in September 2013? That fired the starting pistol on a rough period for Centrica, whose shares were then trading at around 400p, and have since almost halved to 217p.
Miliband wasn’t the only factor, naturally — Centrica’s gas exploration and production arm has been hit by falling energy prices, while a series of mild winters have cooled the bottom line. Utilities also have to grapple with rising wholesale prices and fund costly capital expenditure programmes, with SSE spending more than £9bn over the last six years.
Centrica recently held its dividend flat, despite a successful efficiency programme that delivered £384m of savings, and a 4% rise in operating profits to £1.5bn. Investors are cautious, with the Government’s recent cap on tariffs for pre-pay households already set to wipe up to £80m from its 2017 earnings.
SSE’s share price has held up better, but it has still risen just 13% over the last five years. Like Centrica, it is also losing customers, as small new suppliers are encouraged to enter the market, boosting competition, a trend we can expect to continue. If Theresa May is true to her word, investors could soon be badmouthing the utilities as well.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Centrica. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.