The FTSE 100 is still struggling for traction as global Covid-19 infections rise. It could continue to do so as Covid-19-related news flow rattles investor nerves. Despite this, though, SSE (LSE: SSE) is a share I’d happily load up on following the outbreak.
I haven’t always taken a bullish stance on this particular utilities provider. The shocking erosion in its retail customer base long made it an unattractive pick despite its big dividend yields. But the sale of its battered retail arm to Ovo Energy earlier this year now makes it worthy of serious attention today.
No Covid-19 effect
Look, SSE isn’t a company without risk. The Covid-19 outbreak and its significant economic impact had had “no material impact” on the FTSE 100 colossus yet by late March, it said previously. It’s not necessarily a surprise given the ultra-defensive nature of its operations.
SSE did warn, however, that it could change the timing of dividend payments should its businesses begin to struggle following the outbreak. It said that the decision would be made “in the long-term interests of the company.”
The power play had also advised last month’s earnings would come in at the lower end of estimates for the then-outgoing financial year (to March 2020), even stripping out the coronavirus effect.
As I say, though, March’s update underlined the robustness of SSE’s operations. Electricity is one of those essential commodities that individuals and business cannot do without. These are unprecedented times, sure, but it’d be a mistake to expect the Footsie firm’s earnings to suddenly fall off a cliff.
This explains SSE’s decision to keep the five-year dividend plan it released almost two years ago up and running. Under the plans, annual payouts of 80p per share are slated for fiscal 2020 and 2021. As a consequence the blue chip’s forward yield sits at a mighty 6.5%. It’s a particularly impressive figure as dividends from other FTSE 100 firms fall like dominoes.
A FTSE 100 star
Now SSE hasn’t been immune to the share price washout of recent weeks. It has dropped 27% in value since the coronavirus panic stepped up several notches in late February. Other major utilities players like National Grid and Centrica have also fallen heavily.
Why? Fears over their liquidity mixed with concerns over their ability to get credit. However, the boffins over at UBS believe that such fears are possibly being overplayed. They comment that “the strong liquidity position of the utilities… supports our view that the sector as a whole has been underperforming and should be behaving more defensively in the current market conditions.”
What’s more, they comment that SSE has enough liquidity to meet its financing needs for the next year at least. It looks then like the market has overreacted in busily selling the electricity giant more recently. I’d take advantage of this by buying the business on its cheap forward price-to-earnings ratio of 13.4 times. And that gigantic dividend yield provides another great reason to pile in.
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Royston Wild 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.