Approximately 30% of the energy we produce in the UK is from renewable energy sources. The target is to increase this to 50% by 2025 if we are to alleviate the ongoing concerns about climate change. SSE (LSE:SSE) wants to capitalise on this demand and has re-shaped its business to focus on renewable energy, alongside its energy networks. If the strategy is executed well, SSE has the potential to be a future renewable energy star.
Evolution, not revolution
In reality, SSE is already well established in the renewable energy market: the profits it generates from renewables already account for 38% of its overall profit. Its desire to treble its renewable energy output by 2030 is motivated by capitalising on sector growth and its undoubted profitability. This is in direct contrast to its energy networks business, which is slow-growing and highly regulated. It does have the potential to become a renewable energy star, but I suspect part of the upside may already be included in the current SSE share price.
The decision to offload its challenging household energy supply business was well received by investors. The income from this sale and the disposal of other assets is desperately needed to help fund the £7.5bn capital investment programme over the next five years. Ensuring net debt remains under control whilst funding new assets will be its biggest challenge.
Income investors were relieved that SSE maintained its dividend policy, despite the short-term challenges the coronavirus will have on its business. Whilst the dividend was cut for the first time since 1998, income investors will be buoyed that its current yield is still above 5%.
The SSE share price has only fallen 15% since the end of February. This is far less than the wider market during the same period and demonstrates the company’s good defensive qualities. The share price has upward momentum and is currently higher than it has been since the summer of 2018.
SSE is clearly on the right track, but I am not convinced it will become a renewable energy star just yet. My concern is that a lot of the positive news is already included in SSE’s share price. I don’t see it growing rapidly in the next few years as it struggles with the burden of financing a hefty capital investment programme, managing debt and maintaining the all-important dividend.
Renewable energy alternative?
Financing large capital investment programmes is the biggest barrier to entry in the renewable energy market. However, this is not a problem for The Renewables Infrastructure Group Limited, which cleverly funds its acquisitions using its revolving credit facility, which is then repaid via new equity releases. The company is multi-national, free from debt and pays a growing quarterly dividend of 5.5%. More than 75% of its revenues come from national governments, which provides it with relative revenue certainty and defensive qualities.
If you prefer to invest in a company with no debt and a growing dividend, this could be the renewable energy star you were looking for.
Ben Race 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.