As one of the UK’s top utility companies, SSE (LSE: SSE) is considered to be a FTSE 100 top dividend stock. Indeed, with a dividend yield of 6.8% at the time of writing, as an income investment SSE looks to be one of the market’s champions.
However, I believe there’s another FTSE 100 stock that might be a better buy for investors, thanks to its strong cash generation and flexible dividend requirements.
Achieving the best returns for investors
But first, let’s look at SSE. It might offer a high dividend yield today, but I’m concerned about the company’s future. With the government proposing restrictions on energy pricing, and overall costs pushing higher, SSE is facing a profit margin squeeze.
As well as the dividend to investors, SSE has to be able to fund debt costs and capital spending, both of which management should prioritise over shareholder distributions. This indicates that SSE might have some hard choices to make in the years ahead. As the group’s dividend payout is only covered 1.3 times by earnings per share, there’s not much headroom for extra costs in the budget.
That being said, the company might be able to work something out, so it can save the dividend, although I’d rather be safe than sorry. Shares in SSE’s peer Centrica have lost around 40% of their value since the firm cut its dividend a few years ago, so I would not want to risk a similar capital loss if I owned shares in SSE.
And that’s why I believe mining giant BHP Billiton (LSE: BLT) is a better dividend buy.
Flexibility is key
BHP is attractive because of its flexibility. Rather than commit itself to an annual pre-defined dividend distribution, BHP’s payout is flexibly based on the level of profits the company earns in a particular year. This year, analysts believe the shares will yield 4.3%, but there’s also the chance of special dividends if the firm exceeds forecasts. Management has promised to distribute 50% of underlying earnings as dividends.
According to a quarterly trading update issued by BHP today, the business is on track to hit City forecasts for the full-year.
“Our performance in the first quarter keeps us on track to deliver 7% volume growth in the 2018 financial year,” said chief executive Andrew Mackenzie. “We manage the portfolio for value and returns. Our transition to lower-cost, high-return, latent capacity projects is delivering results, with first copper production achieved from the Los Colorados Extension project at Escondida and Olympic Dam’s Southern Mining Area during the quarter.“
Higher output and broader margins will likely mean a hike in the dividend payout for next year as the company meets its 50% payout target.
All of this excludes any positive impact from activist hedge fund Elliott Advisors, which has been running an aggressive campaign against BHP to overhaul its strategy and boost returns to shareholders. With Elliott owning 5% of the company, I’m inclined to believe that the fund will produce the best possible returns for investors.
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Overall, BHP looks to me to be a better buy than SSE because of the company's flexible dividend policy and involvement of Elliott, which is set on improving investor returns.
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Rupert Hargreaves does not own any share mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.