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Buying undervalued dividend stocks is one of the most popular ways to build wealth. Here I’ll talk about one dirt-cheap utilities company,  SSE  (LSE:SSE), one of the largest companies specialising in electricity and gas.

My colleague Kevin Godbold wrote an excellent article about this utilities company. He considers SSE to be a great investment opportunity. Generally speaking, I agree with his view but I’d look at the firm from another angle.

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What utilities company is it?

First of all, the firm aims to become the leader in renewable energy. Therefore, being environmentally friendly is one of the company’s top priorities.

Nevertheless, some analysts say that renewable energy has many drawbacks. One of them is higher costs. The consumer demand for alternative energy, on the other hand, is not very high. This is because gas and oil are really cheap now. Moreover, being eco-friendly is a popular topic and there is, arguably, too much hype about it.

As a matter of fact, investing into necessary long-term energy generation projects requires a lot of capital expenditure. In the current situation, of the coronavirus pandemic and uncertainty about Saudi-Russian relations, renewables would face decreasing investment. 

However, many governments, charities and even investment funds strongly encourage sustainability. The UK aims to produce “net zero” emissions by 2050, reflected in the legislation. Undoubtedly, after the end of the crisis the government should invest more into renewable utilities.  

SSE considers private households to be its potential customers. It also aims to produce electricity for public transportation. Many experts think that electric vehicles have a great future.

Quite recently, SSE sold its energy services business to OVO Energy, one of the biggest electricity suppliers in the UK. It is part of SSE’s decarbonisation initiative. Indeed, it was a large benefit for the SSE’s balance sheet. 

Is it a dirt-cheap stock?

I will find out if SSE is undervalued according to the following criteria:

P/E P/B Dividend
yield
Current
ratio
Debt-to-equity Credit rating
S&P
Credit rating
Moody’s
18.63 2.22 7.8% 1.028 3.34 BBB+ stable Baa1 stable

Revenue and profit history

Year 2019 2018 2017
Revenue in £ millions 26,316.8 27,250.4 29,037.9
Net profit after tax in £ millions 1,455.7 920.1 1,718.8
Earnings per share* (pence) 67.1 98.8 104.3
Dividend per share (pence) 97.5 94.7 91.3
Dividend cover ratio 0.69 1.04 1.14

*Please note that adjusted earnings per share are taken as opposed to reported earnings per share.

The balance sheet position of the utilities company needs improvement, since the current ratio barely allows SSE to pay its current debts. The debt-to-equity ratio is not ideal. However, it is common for many companies these days to have such a financial position. Moreover, S&P and Moody’s consider the company’s financial strength to be sound although not completely risk-free.

The price-to-earnings ratio is not high, but if we were to take reported earnings per share, it would be lower. The dividend yield is excellent. Even though the dividend cover ratio suggests that the yield is not sustainable, management seems to be optimistic and even issued a dividend plan for several years. The fact that SSE keeps raising dividends in spite of falling earnings per share inspires some hope. I also like the fact that the total net profit increased between 2018 and 2019.  

What next?

The company is likely to successfully complete its restructuring process, and offers great dividends. Yet, I would not buy it just yet. 

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Anna Sokolidou does have any position in the company mentioned in this article. 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.