Utilities companies like National Grid (LSE: NG) and SSE (LSE: SSE) have long been seen as reliable income providers, with great visibility of earnings and the ability to translate a high proportion of them to dividends.
National Grid, for example, is expected to provide a dividend yield of 5.6% this year, rising to 5.9% by 2021. SSE’s forecast yield is already even higher at 8.2%. But that would be nowhere near covered by an expected big dip in earnings, and is forecast to drop to 6.7% next year — but still pretty big, if relatively weakly covered.
SSE is already suffering with rising debts, and that’s added a bit of a drag to the share price. But both of these companies have suffered sharp share price falls in the past month — National Grid shares are down 6.1% with SSE down 7.4%, over a period in which the FTSE 100 gained 3%.
The recent dip was triggered when the BBC published an online article under the headline: “Labour to outline National Grid ownership plans,” reporting on Jeremy Corbyn’s apparent upcoming speech outlining his detailed nationalisation plans. It seems he changed his mind and decided to put off the subject until a later date, and the BBC pulled the article. But the damage was done.
Corbyn hasn’t spoken directly about SSE itself, but he has made clear his intention of nationalising the utilities business.
Whether Labour will win the next election is completely up in the air — but Corbyn’s chances might be high, with surveys suggesting around three quarters of the UK population are in favour of his nationalisation aims.
But it would be an enormous task. National Grid and SSE are the two biggest, with market capitalisation figures of £28.4bn and £11.8bn, respectively. Adding just the other FTSE 100 utilities firms to the list gets us a total of £56.9bn.
Then there are all the new upstart energy suppliers whose businesses will have to be bought out, and there are going to be plenty of other hefty costs too — so it’s going to be an expensive business.
Corbyn has mooted the idea of compensating shareholders with government bonds. Now, I don’t know about you, but I certainly don’t want any of those — though I suppose they can be sold easily enough.
One big uncertainty is what prices the companies might be bought out at. But it’s hard to imagine a possibility these days of the government being able to snap them up on the cheap at below market value. But those market values are already being damaged by Labour’s pronouncements.
A buyout of National Grid would be complicated by the fact that half the company’s business in in the USA, though that hurdle is not there with SSE.
The two things that make me feel shareholders don’t have a huge amount to worry about is that there will surely be big legal challenges to anything institutional investors might feel is unfair, and that I expect it will all take a very, very long time.
In my view, either nationalisation won’t actually happen, or if it does, it will be at a fair price.
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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.