Utility companies, who provide basic services such as power, water and gas, are traditionally seen as defensive investments. This is because these goods are considered necessities, which means that demand will remain relatively stable even during periods of economic stress.
On the other hand, during periods of strong economic expansion, these sectors will grow at a much slower rate than the rest of the economy. As a result, their shares tend to be of interest to investors looking for a nice dividend rather than for capital growth. However, there are exceptions, and one of these is the energy company SSE.
The core of SSE’s energy business involves delivering electricity across southern England and Scotland. While this is considered a low-risk, humdrum activity, SSE is doing several things to boost growth, including launching an ambitious £33 billion investment programme.
Try 6 free issues of MoneyWeek today
Get unparalleled financial insight, analysis and expert opinion you can profit from.
Start your trial
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Part of the money will be spent on increasing its capacity for generating renewable energy. The group believes that the planned transition to a low-carbon economy will continue, resulting in consumers being willing to pay a premium for renewable energy.
Latest Videos FromMoneyWeek
SSE is upgrading the network
However, the vast majority (around two-thirds) of SSE’s investment is directed at upgrading its electricity-transmission network. The idea is that this will enable it to make money by connecting the producers of renewable energy to the national grid, where the electricity can be transported to those who need it. Provided SSE can deliver the various infrastructure projects on time and on budget, this should enable it to receive a high return on this investment.
Of course, there is no guarantee that these plans will work, which makes SSE riskier than other UK energy companies. The firm’s strategy depends on energy prices not falling and demand for green energy remaining strong. However, the potential upside is greater too, especially if the demand for electricity from data centres and from other sectors of the green transition (such as electric cars) accelerates the pace at which electricity is required in the overall economy.
So far the strategy seems to be paying off. SSE’s revenue jumped by almost 50% between 2021 and 2025, with normalised earnings per share more than doubling between 2020 and 2025. SSE’s management expects this trend to endure, projecting that earnings per share will increase by 7%-9% a year over the next five years, allowing it to increase its dividend by up to 10% a year over the same period.
Despite these bullish estimates, the stock trades at only 14 times estimated 2027 earnings, with a solid dividend yield of 2.8%.
SSE’s ambitious plans seem to have caught the imagination of investors. The share price has risen 26% over the last six months and 44% over the last year. SSE shares also trade above their 50-day and 200-day moving averages.
I would therefore suggest you go long at the current price of 2,596p at £1 per 1p. In that case, I would put the stop-loss at 1,600p, giving you a total downside of £996.
This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
