SSE (LSE: SSE) posted a disappointing trading update this morning. For the quarter ending 30 June, both its thermal and renewable energy production fell. But this FTSE 100 stock’s price has moved less than 1% in today’s trading so far.
I reckon this may change over the rest of the day as investors fully absorb the update. But I can also see possible reasons for why there has been no sharp immediate reaction. And that is because there are some positives to the update too.
Committed to increasing dividends
The biggest of these, in my view, is that it reinforces its dividend commitment for up to March 2023 right at the start. According to this, SSE will increase its dividends by 1.2% each year, to compensate for inflation. At a time when inflation is an investor concern, I think this is significant. And this increase will be over and above an already healthy dividend amount. The company’s dividend yield is at 5.4%.
In another development, which can hold it in good stead in the years to come, SSE is focused on realising a net-zero strategy. To this end, it is selling off assets that do not align with it. One example is its sale of SSE Contracting, which is the UK’s largest street light contractor, to Aurelius, which invests in companies that can improve with support.
Besides this, it is also expanding its renewable energy business. The company is already the biggest clean energy producer in the UK and Ireland. It is building on this by constructing the world’s biggest offshore wind farm at Dogger Bank in the North sea, among other projects.
Scope for improvement
I would also refrain from reading too much meaning into weak output for renewables in the latest quarter, considering that it is explained by weather conditions. I do hope, however, that this corrects itself over the rest of the year, otherwise it can tell on SSE’s financials.
Particularly because of this, I will be on the lookout for updates on its performance in the next few months. Also, while I like its dividend policy, some economists believe inflation levels can be significantly higher and for a long time. To that extent, an inflation-linked policy may not help. Although, the verdict on this one is really out there.
Would I buy the FTSE 100 stock?
On the whole, though, I like SSE stock from a passive income perspective. There are other stocks with a higher dividend yield, but I like the visibility around this company’s dividends. Its share price has also seen a small 6% rise over the past year and its price-to-earnings (P/E) ratio is at a superbly low 7 times right now.
SSE also has an ethical appeal and it is working hard to be a 21st century company that addresses the demand for green energy. It has a lot going for it. This FTSE 100 stock is a buy for me.
Manika Premsingh 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.