The company’s positive performance was somewhat surprising, since political risks facing the UK remained high throughout August. This caused a number of its industry peers to experience volatile share price performances, with the utility sector’s defensive appeal fading somewhat as a result of the prospect of possible nationalisation following a general election.
SSE updated the market on 12 August regarding plans for its domestic energy business, SSE Energy Services. It confirmed that it was in talks with fellow domestic energy supplier Ovo Energy regarding a potential sale of the business. This was confirmed on 13 September, with Ovo Energy agreeing to purchase SSE Energy Services for an enterprise value of £500m.
This move seems to have been welcomed by the company’s investors, and may have contributed to a buoyant share price over recent weeks. The company has been seeking to exit the domestic energy supply sector for a number of months, but has struggled to do so as quickly as it had envisaged.
With the sale of its energy services business to Ovo Energy, SSE can now focus on its renewable energy assets that are expected to become increasingly valuable over the long run. The UK has legislated for zero emissions by 2050, which could provide the business with an increasingly favourable financial outlook.
According to the company’s July trading statement, though, its recent performance has been disappointing. It failed to meet its previous guidance on renewable energy output in the first three months of the year. However, it remains on track to meet its forecasts for the full year, while its five-year dividend plan remains intact.
This includes an aim to increase dividends by at least as much as RPI inflation. Since RPI has historically tracked higher than CPI inflation in many years, this could mean that investors enjoy a rise in their income payments that is above CPI over the medium term. Since the stock currently has a dividend yield of 6.8% that is covered 1.5 times by net profit, its overall income investing appeal seems to be high relative to the wider FTSE 100.
Given that interest rates are expected to remain low and an uncertain world economic outlook may inhibit dividend growth across the FTSE 100, SSE’s dividend appeal may catalyse its share price. Risks such as the political and economic uncertainty facing the UK could mean that its shares fail to find a clear direction in the short run – especially after a weak recent trading update. But, over the long run, the business seems to offer investment appeal as it delivers on its renewable energy strategy.
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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.