We may be headed for a recession, but utility bills are essential bills. Alongside your mortgage, and council tax, they simply have to be paid. This is the reason I keep a close eye on utility stocks. Consumers may be cutting back on luxuries, but they will continue to pay utility bills, even during a market crash.
With that in mind, the crash has thrown up some bargains in the form of utility stocks. I would consider SSE (LSE:SSE) as one such opportunity.
SSE is involved in the generation, transmission, distribution and supply of electricity and the production, storage, distribution and supply of gas. It recently sold its struggling retail business to leading independent provider OVO Energy.
Market crash update
In a market crash-driven trading update, SSE addressed its full-year results that are pending. And the big takeaway for me was the fact it will be paying a dividend for the most recent financial year.
On top of this, it also plans to pay a dividend for the current financial year too. And SSE has committed to raising dividends by at least as much as inflation over the coming years.
This is music to the ears of investors, and something I believe will increase demand for the shares. The market crash has seen many Footsie peers scrap, cut or postpone dividends, so SSE has bucked the trend.
Like other companies out there, SSE has confirmed it can’t yet predict the true impact of the Covid-19 pandemic. Yet one positive point was its access to £1.5bn worth of funding under its revolving credit facility, which could be crucial in this turbulent time.
SSE has lost close to 30% of its share price value in the market crash. But at the time of writing, its share price had climbed back to over 1,220p per share from its year-low of 1,072.5p. It has taken steps to work smarter rather than harder in my opinion. As I mentioned, it sold its troubled retail arm. And it has embraced greener energy initiatives, which means it will play a part in the government’s aim of a greener economy.
SSE’s current share price, and the fact it possesses a juicy 6.5% dividend yield indicate to me a firm that’s undervalued right now. A 6.5% dividend yield is extremely impressive during normal market conditions. To provide some perspective, the FTSE 100 average was closer to 4% at the turn of the year prior to the downturn. I feel a big reason investors may have shunned SSE in recent times is due to its failing retail business. With the retail arm now off its books, I feel SSE looks a more attractive prospect.
Nobody quite knows whether the market crash is over or if there’s further turmoil ahead, but I would consider SSE as a great opportunity. The demand for power may be affected somewhat by the economic downturn but I do not feel this will be enough to hinder utilities companies longer term. Overall I just feel the positives outweigh very few negatives right now and SSE has a defensive look about it as a stock. This could be a great buy right now to hold for a long time.
Jabran Khan 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.