It seems like only yesterday that high-dividend energy suppliers were must-haves in everyone’s portfolios, especially those wanting regular income in retirement.
But with growing competition from smaller competitors and increasing pressure to cap prices, shares are plunging. SSE (LSE: SSE) shares are down 30% since the end of 2013, and the whole sector has performed similarly.
SSE warned us in July that the hot dry summer of 2018 coupled with high gas prices have taken their toll on likely profits for the full year, and we had an update on that on Wednesday.
The likely impact looks set to be an operating profit shortfall of around £190m compared to previous expectations, with adjusted operating profit for the six months to September likely to only reach around half of the total for the same period in 2017. And the outlook for the year suggests something significantly behind previous expectations too.
We also have some uncertainty in SSE’s forward visibility with its ongoing plans for hooking up with Npower, and leaving SSE to focus on gas and electricity production. That lack of clarity will surely be affecting the share price now too.
But the company says it “continues to expect to recommend a full-year dividend of 97.5 pence per share for 2018/19 and to deliver the five-year dividend plan set out in May 2018,” suggesting that income stream is safe for the next few years at least.
The share price dropped nearly 10% in Wednesday morning trading, and full-year forecasts will now need to be revised. But a forward P/E on previous predictions of only 10 suggests to me that there’s plenty of safety margin there, and I’m still optimistic about SSE as a long-term investment.
National Grid (LSE: NG) has long been my favourite stock in the energy distribution market, as I see its ownership of the common infrastructure as making it a long-term winner regardless of who’s actually selling the gas and electricity that comes out at the ends of it.
But the gloom has spread here too, with National Grid shares underperforming even the lacklustre FTSE 100 over five years, and losing a third of their value since their peak in July 2016.
The company is still heavily affected by regulatory restrictions and it does have some pretty hefty capital expenditure obligations, but its forward earnings are some of the most visible and predictable on the market, and that allows National Grid to maintain a clear dividend focus.
Those dividends have been yielding around 4.5%-5% over the past five years, but a progressive dividend policy coupled with the share price fall has boosted forecast yields to 6%. To me that’s looking remarkably like an opportunity to get in on a good long-term income investment on unusually good terms.
National Grid shares are more highly valued than SSE’s, on forward P/E multiples of around 14 and close to the FTSE’s long-term average, against SSE’s very low-looking 10 (on existing forecasts prior to today’s news). But with considerably less uncertainty, and a monopoly on the distribution network, I can’t help feeling National Grid is even better value than SSE.
But I reckon either could make a profitable addition to our pension nest-eggs.
Alan Oscroft has no position in any of the shares 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.