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Why I would dump the SSE share price and buy this FTSE 100 growth leader

I think utility provider SSE (LSE: SSE) is one of the most overrated stocks in the FTSE 100 today. 

As I’ve said before, over the past decade, SSE has been spending more than it can afford, rewarding shareholders with a fat dividend yield that’s not covered by cash generated from operations. This has put the company on a worrying trajectory. Debt has ballooned and now earnings are falling, (dividend cover has declined from 1.8 in 2008 to just 1.1 today), management faces a stark choice: cut the dividend drastically or start selling off parts of the business to appease investors.

Selling the family silver 

It seems that management is pursuing both options. The company is planning to reduce its dividend, but only by 20%, and it is flogging hundreds of millions of pounds of assets.

Towards the end of last year, the company announced the sale of two giant wind farms for £635m, taking total asset disposals agreed in the year to £1bn. 

But even these funds will only be a stop gap for SSE. Capital expenditure set to rise to £1.7bn, from £1.5bn last year, and earnings are expected to continue to fall, which means net debt will continue to rise. A figure of £9.8bn is pencilled for year-end 2019. Despite this, management continues to target paying a dividend of 97.5p in 2018/19 before rebasing the payment to 80p next year (payout growth in line with RPI is projected from then on).

Considering all of the above, I think it’s only a matter of time before SSE has to cut its dividend even further. With this the case, I’m staying as far away as possible from its current yield of 8.2% (falling to 6.8% in 2020).

Conservative approach 

I’m much more optimistic about the prospects for global consumer goods giant Reckitt Benckiser Group (LSE: RB). With a dividend yield of just 3.1% at the time of writing, this company might not seem immediately attractive to income seekers. However, it’s the quality of the payout that excites me. 

Unlike SSE, Reckitt’s dividend is well covered by earnings per share and cover has grown over the past five years, from 1.5 times to just under 2. At the same time, earnings per share have increased by approximately 60% since 2013 (meanwhile, SSE’s have fallen). 

Looking forward, City analysts are expecting the group to report earnings growth of around 8% over the next two years. Granted, this isn’t the most explosive growth, but when you consider the defensive nature of this business, I think it’s attractive.

And after recent declines, the stock is currently trading at one of its lowest valuations in several years. The shares are dealing at a forward P/E of just 16.7, that’s below the five-year average of around 22, implying shares in Reckitt could be undervalued by as much as 30%. 

This discount, coupled with the company’s conservative dividend policy, makes the stock highly attractive, in my opinion.

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Rupert Hargreaves owns no 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.