I wouldn’t normally consider selling a stock I hold on short-term bad news, but something strange has happened to SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) this week, and it’s made me wonder whether I should consider selling my SSE shareholding.
On Tuesday, Labour leader Ed Miliband climbed on his soapbox at the Labour Party conference, and said that if he wins the next election, he will freeze utility bills until the start of 2017.
Although the stock market shrugged off this threat on Tuesday afternoon, when markets opened on Wednesday, SSE started falling, and is currently down by almost 7% on Monday’s opening price, as is its UK peer, Centrica.
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Markets hate uncertainty
Mr Miliband’s underlying implication that utilities firms are led by fat cats who are making outsized profits is sure to be a vote winner, despite the fact it isn’t necessarily true.
Many energy industry experts think that one of the main reasons our energy bills keep rising is the cost of subsidising the development of renewable energy. Unfortunately, Mr Miliband’s plan is unlikely to solve this problem. Instead, it will probably scare off would-be energy investors, who hate uncertainty, due to the long timescales their projects require.
Sell SSE, buy National Grid?
Until this week, I’d have said that SSE was less risky than National Grid, but Miliband’s plans make it clear that National Grid is now the safer bet.
SSE is the UK’s largest renewable generator, and its second-largest retail energy supplier. In other words, SSE operates in the two areas that will be most affected by Mr Miliband’s policy.
National Grid’s US business would be unaffected by Miliband’s price freeze, and its UK operations are all in the wholesale market, so they wouldn’t be affected either.
Bond yields and dividends
This week’s drop means that SSE shares now offer a prospective yield of 6.0%, which is undeniably attractive. However, dividend growth isn’t guaranteed, and if Labour gets elected in 2015, and Mr Miliband freezes retail energy bills, SSE’s dividend track record might be derailed.
There’s also the possibility that as government and corporate bond yields continue to rise, income stocks such as SSE will fall, so that their dividend yields remain higher than less risky bond yields.
In all honesty, I haven’t yet made a firm decision to sell my SSE shares, but for the first time ever, I am thinking about it.
