Shares in focus: Can SSE keep growing dividends?

published 3 February 2012

What is it?

SSE is one of Britain's largest gas and electricity companies. It owns more than 11,000 megawatts of electricity capacity, generated from gas, coal, hydro, wind and biomass. It supplies gas and electricity to more thanten million customers in Britain and Ireland, along with other services, such as boiler and central heating maintenance, and telecoms and broadband.

SSE owns the regulated electricity transmission and distribution network for the north of Scotland, electricity distribution in southern England, and 50% of the gas distribution networks in Scotland and southern England. It also operates two gas storage facilities in East Yorkshire and an 11,100km telecoms network.

What is its history?

Formed in 1998 by the merger of Scottish Hydro Electricity and Southern Electric, SSE has been one of Britain's most successful utility companies, more than doubling its share of the British energy supply market in the last decade. In that time, it has also been one of the best dividend payers in the FTSE 100, growing its payments by an average of 9.6% a year.

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Investments such as the 2004 purchases of the Fiddlers Ferry and Ferrybridge coal-fired power stations, and its investment in gas networks in 2006, have paid off, with earnings from the low-risk, regulated network assets balancing out the more volatile power-generation business. In 2008, SSE also began making significant investments in wind power, with the acquisition of Airtricity.

Who runs it?

Ian Marchant, formerly finance director, has been chief executive since 2002. He was paid £1.2m in 2010/2011. Lord Smith of Kelvin (who also chairs oil services group Weir) has been chairman since 2005. Gregor Alexander is finance director.

How's trading?

Results for the six months to September 2011 saw adjusted pre-tax profit fall by 25% to £287.4m, while earnings per share fell by 24% to 25.1p. The interim dividend was raised by 7.1% to 24p per share. While most of SSE's businesses performed well, its energy supply business saw profits fall by 71%, as the company was unable to pass higher wholesale gas costs on to customers. Lower demand and margins for electricity also hit profits.

What's the outlook? SSE still expects a very small rise in full-year profits, which might be ambitious, given the 25% decline seen in its first half. It also says it is on target to grow dividends by 2% above inflation until 2013. Beyond that, SSE should continue to earn reasonable returns from its regulated network assets, but its big investments in renewable energy are far less secure: these are expensive and power prices need to stay high to make them pay. If the British economy stays in the mire, then SSE's returns could disappoint, and perhaps threaten its ability to keep growing dividends.

The analysts

Of the 24 analysts surveyed by Bloomberg, nine say "Buy", 12 "Hold" and three "Sell". The average price target is 1,369p 13% above the current share price. Most bullish is Exane with a 1,630p price target, whereas Goldman Sachs is most bearish with a 1,225p target.

The numbers

Stockmarket code: SSE

Share price: 1,212p

Market cap: £11.4bn

Net assets (Sept 2011): £4.6bn

Net debt (Sept 2011): £6.4bn

P/e (current year estimate): 10.9 times

Yield (prospective): 6.6%

Our view

SSE's big bet on renewable energy looks increasingly risky, given the weak state of the British economy. We believe that the days of stellar dividend growth may now be over. It's time to sell.

Directors' dealings

Non-executive directors Jeremy Beeton and Katie Bickerstaffe both purchased 2,000 shares last autumn. Chief executive Ian Marchant and finance director Gregor Alexander respectively sold 5,970 and 3,371 shares in June last year. Recent share activity can be seen in the chart on the left, with the main directors' shareholdings shown below.

Directorand sharesheld

I Marchant: 231,978

G Alexander: 93,883

A Phillips-Davies: 104,031

R Smith: 22,600

Phil spent 13 years as an investment analyst for both stockbroking and fund management companies.

After graduating with a MSc in International Banking, Economics & Finance from Liverpool Business School in 1996, Phil went to work for BWD Rensburg, a Liverpool based investment manager. In 2001, he joined ABN AMRO as a transport analyst. After a brief spell as a food retail analyst, he spent five years with ABN's very successful UK Smaller Companies team where he covered engineering, transport and support services stocks.

In 2007, Phil joined Halbis Capital Management as a European equities analyst. He began writing for MoneyWeek in 2010.