Utility shares such as SSE (LSE: SSE) have been relatively unpopular over the last couple of years. Regulatory risks have increased, and this has caused investors to apply a wider discount to their intrinsic values. The end result is high yields across the sector, with SSE currently offering an income return in excess of 7%.
Of course, it’s not the only utility company that could offer an impressive income return. Reporting news on Friday was a stock that could deliver strong dividend growth, with its valuation also suggesting that it could offer investment potential.
The company in question is integrated waste management services specialist Biffa (LSE: BIFF). It announced that it has acquired Weir Waste Services, which is a provider of waste and recycling solutions in Birmingham. The company has been acquired for a consideration plus debt taken on of £16.2m. The deal will be funded from the company’s existing cash and debt facilities.
Alongside the acquisition, Biffa also announced that is has agreed a further three purchases in the current financial year for a total consideration plus debt taken on of £3.9m. All of the acquisitions will be incorporated into its Industrial & Commercial division, with them enhancing its platform in a number of different regions across the UK.
Although the company has a dividend yield of just 2.9% at the present time, it could offer strong dividend growth over the medium term. It is expected to report a rise in earnings of 7% next year. When combined with its dividend coverage ratio of 2.8, it seems to have scope to raise shareholder payouts. As such, the stock could become an increasingly appealing dividend option for the long term, with a price-to-earnings (P/E) ratio of 13 being relatively attractive.
SSE’s dividend prospects may also be relatively bright. Although the company faces regulatory risk, the changes it is making to its business model could lead to a stronger entity over the medium term. It is set to merge its retail arm with Npower in order to create a new market model which could become a dominant player in what remains a highly-competitive industry. The demerger may also allow the existing company to focus on its core operations and deliver greater efficiency over the medium term.
This could help to support strong dividend growth for the business which matches inflation over the coming years. This may help to maintain its status as one of the stocks with the highest income return in the FTSE 100, with its current yield of 7.7% being double that of the wider index.
Furthermore, with a price-to-earnings (P/E) ratio of around 12, it seems to offer good value for money. Although there may be a period of change and uncertainty ahead for the business, the SSE share price seems to include a margin of safety which indicates that investors have already priced-in its potential challenges.
Peter Stephens owns shares of SSE. 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.