The Motley Fool

Why the SSE share price rose 5% in August

The SSE (LSE: SSE) share price delivered a 5% rise in August. This was a significantly stronger performance than that of the FTSE 100, which declined by 5% during the same period.

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.

Claim your FREE copy of The Motley Fool’s Bear Market Survival Guide.

Global stock markets may be reeling from the coronavirus, but you don’t have to face this down market alone. Help yourself to a FREE copy of The Motley Fool’s Bear Market Survival Guide and discover the five steps you can take right now to try and bolster your portfolio… including how you can aim to turn today’s market uncertainty to your advantage. Click here to claim your FREE copy now!

Renewable energy

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.

Income potential

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.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, “10 Steps To Making A Million In The Market”.

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide.

Simply click here for your free copy.

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.