Questions are being raised over the future of dividends from energy supplier SSE (SSE) if it successful in spinning off its UK household supply operations and merging them with rival Npower.

Merger talks were confirmed in November 2017. A deal would marry the pair’s UK retail units, effectively combining two of the UK’s big six business and household gas and electricity providers into a single entity.

The current plan is to list the combined entity as a standalone business on the London stock market in late 2018 or early 2019.

The merger faces intense scrutiny from UK regulators given it involves two of the UK’s dominant energy suppliers. Initial engagement with the UK’s Competition & Markets Authority (CMA) is believed to have begun regarding the spin-off, although this is just the start of what is likely to become a protracted process.

Phase I of the review process has not started yet but will take 40 days once commenced, SSE says.

The only guidance coming from the group thus far on future dividend payments came in November, and reiterated on 31 January in a third quarter update.

SSE says that following the demerger of the household energy supply and services business, its dividend and dividend policy will reflect the quality and nature of its assets and operations, the earnings derived from them and the longer-term financial outlook. More information will be published in June 2018.

A reliable and high-yielding income is arguably the biggest reason that investors would consider owning shares in SSE. The company has increased its dividend payment every year since 2001. It aims to lift the dividend every year by at least the retail price index measure of inflation.

In the year to 31 March 2017 SSE paid ordinary dividends to investors worth 91.3p per share, a 2.1% increase on the previous year’s 89.4p payout. That does not include special dividends.

Forecasts suggest a 3.5% increase in the payout is due this year to 31 March 2018 for a 94.5p per share dividend, rising another 3% to 97.4p in 2019.

But those forecasts would have to change if the demerger goes ahead as SSE would be left with a smaller business – potentially a good chance for it to rethink the dividend policy.

We would be very sceptical towards market forecasts for SSE’s dividend beyond the current financial year (to 31 March 2018) as they are unlikely to factor in the planned demerger.

For example, investment bank UBS forecasts 98.4p for the year to March 2019 – implying a 7.9% yield based on the latest share price of £12.42.

Investors considering buying SSE shares should acknowledge a risk to future dividends or hold off until more information is provided in the summer.

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