SSE’s dividend payment sparks fresh interest in utility

“SSE’s decision to withdraw from the rough-and-tumble of the retail energy market, limited hit from unpaid bills and confirmation of its 80p-a-share annual dividend for the last financial year are all generating interest in the utility’s shares from investors as the firm looks to focus on the power generation and transmission markets for the long term,” says Russ Mould, AJ Bell Investment Director.

“SSE has also repeated its commitment to its five-year dividend payment plan that runs to 2023, whereby and the firm will increase dividend distribution by the rate of retail price index (RPI) inflation for each year.

“This will come as a relief to income-hungry investors, even if the 80p-a-share payment represents a decrease on last year’s distribution and ends a long streak of increases in the annual dividend that dates back to at least 1998 and the merger between Scottish Hydro-Electric and Southern Electric, according to Refinitiv data. SSE had warned in its March trading update that a surge in unpaid bills or a deep drop in demand for electricity thanks to the Covid-19 outbreak could have influenced its thinking on dividends, at least in terms of the timing of payments.

Source: Company accounts, Sharecast, consensus analysts’ forecasts

“Although the effects of hedging at the renewables operation, which caps the price received for energy generated, could remain unpredictable, the sale of the retail energy business to OVO for £500 million may help to improve earnings visibility at the company overall after a fraught two years which have seen profit warnings creep out.

“The regulated networks and renewables activities should be less of a political football, especially now the threat of nationalisation has been lifted and the power generation activities focus on hydro and wind power in particular.

“Slightly ironically, SSE’s share price surge means it is no longer among the ten-highest yielding stocks in the FTSE 100, although this is really a bit of a back-handed compliment from investors. The more reliable they think the company’s cash flow will be the more comfortable they will be with dividend forecasts and the higher price they will be happy to pay for the shares – and by dint of mathematics that lowers the dividend yield. The highest-yielding stocks tend to be the ones where there are perceived risks relating to the business model, owing to either competitive or regulatory pressure, or the balance sheet or both. As a result shareholders are paying low prices and thus demanding a high dividend yield to compensate themselves for the risks dangers associated with owning those stocks.”

Source: Sharecast, consensus analysts’ forecasts, Refinitiv data

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