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Utility stocks under pressure but income impact may be minimal
Thursday 27 Apr 2017 Author: Steven Frazer

Energy supply companies have again been thrust into the spotlight with confirmation that the Conservative Party election manifesto will feature a commitment to cap certain power tariffs.

Press speculation earlier this week claims that the current Government would propose plans that cut gas and electricity costs by an average of £100 a year for 17m families, roughly the number estimated by the energy regulator, Ofgem, to be on standard variable tariffs (SVTs).

‘This will be of some concern to income investors in particular, as SSE (SSE) is the fifth highest yielding stock in the FTSE 100 and Centrica (CNA) (the owner of British Gas) the eleventh highest,’ says Russ Mould, investment director at AJ Bell. Their ability to grow those payouts to match or beat inflation may be called into question.

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According to our rough calculations, a 10% cut in the SSE dividend this year to 31 March 2018, from 94.2p to 84.8p, would have minimal impact.

Investors with £5,000 worth of stock currently would see their forward income yield decline from 6.67% to 6%, yet that would reduce the annual income by just £33 this year to £300, a hit that would likely be covered by their household switching to a cheaper energy tariff.

That doesn’t account for the inevitable fall in the share price that would result from a cut to the dividend.

In the dark

With details still be published by the Conservative Party, market analysts remain in the dark about how any price cap might work. Even then, many agree that uncertainty could rule over some utility stocks for the foreseeable future. There are also concerns over reduced competition presuming price caps are applied across the entire energy supply market and not just to the so-called big six, which could squeeze many independents out.

The share prices of Centrica and SSE are predictably weak as Shares goes to press on 25 April 2017, reversing 2.9% and 2.2% to 201.7p and £14.13 respectively. The pair sit number one and two in the UK in terms of the number of energy customer accounts, according to latest Ofgem figures, with roughly 6.64m and 3.86m respectively.

‘It could be material to earnings per share (EPS),’ speculate analysts at Morgan Stanley, which would impact dividend cover and potentially ultimately payouts. ‘But how much would depend on the level of cap, whether it would be company specific, when it could come in to force,’ note the investment bank’s research team.

‘It remains to be seen if this is just political noise or if it will actually impact profitability,’ agree utility industry watchers at Berenberg, the investment bank. (SF)

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