With all three main political parties still to release their election manifestos, it remains a guessing game as to what they might include in an attempt to woo voters. Despite this, I think it’s more likely than not Jeremy Corbyn will re-state his desire to re-nationalise several industries, including the energy sector.
This is just one reason why, despite today’s encouraging half-year numbers, I’m continuing to avoid FTSE 100 income favourite SSE (LSE: SSE).
Return to profit
This morning, the blue-chip revealed a 15% rise in adjusted pre-tax profit to £263.4m over the six months to the end of September. On a reported basis, this came to just under £129m — a clear improvement on the near-£285m loss logged from the same period last year.
In addition to returning to profit, SSE also reported expenditure had been in line with expectations — down 19% to £638.2m — with almost 70% of this related to investment in regulated electricity networks and renewable energy. On a related note, the £13bn-cap revealed poor weather over the autumn had allowed its wind farms to produce more electricity than expected, meaning “renewable output for the year to date is slightly ahead of plan.“
Elsewhere, the sale of its struggling energy services business to Ovo Energy for a cool £500m is expected to complete in early 2020, so long as it’s given the green light by regulators.
Not for me
Some may scoff at the idea of Corbyn becoming PM. Personally, I think the last few years have shown that nothing can be ruled out. Even SSE acknowledged “some headwinds remain in the sector” as a result of the ongoing political uncertainty.
If Labour were to take power, then it seems reasonable to suggest companies such as SSE would quickly fall out of favour with investors. And if the new government were to act on its likely manifesto pledge, it’s unlikely shareholders would receive fair value for any of the companies being targeted.
But there are other reasons why SSE just isn’t for me right now. Having enjoyed a fairly decent 2019 so far, the shares currently change hands for 15 times forecast earnings. That may be roughly on par with the FTSE 100 as a whole, but it’s on the more expensive side relative to industry peers.
I also remain uneasy with the state of SSE’s dividend. Today, the company said it would be reducing its interim payout to 24p per share, with the view to distributing a total of 80p per share over the full year. The latter may translate to a chunky yield of 6.2%, but it’s worth highlighting that profits are expected to barely cover this cash return, even after the aforementioned cut.
This isn’t an absolute disaster from an income perspective — low cover is common for firms working in traditionally defensive sectors. Nevertheless, a lot does appear to be riding on the company’s earnings bouncing back to form and things beyond its control (e.g. the weather) remaining favourable. It’s also worth mentioning that SSE continues to be weighed down by a whacking amount of debt that’s been steadily climbing since 2015.
In sum, SSE isn’t without its attractions, but I do feel there are better, less politically exposed options in the large-cap arena for those looking for reliable income.
Paul Summers 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.