This week saw the domestic energy supply sector being referred to the competition commission. Of course, rumours surrounding collusion and a general lack of competition among the ‘big six’ energy companies have rumbled on for many years, so it could be argued that it is of little surprise that there is to be an investigation into the issue.
Indeed, domestic energy companies continue to suffer from above-average political risk, which has been worsened by Ed Miliband’s promise to freeze electricity prices if Labour win the next election. Despite this, shares in companies such as SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) and Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) seem to offer good value and, crucially, appear to fully price in both events. Here’s why they look attractive at current price levels.
SSE
Despite the previously mentioned political risk, shares in SSE have had a great run in the first half of 2014. Indeed, they have risen by over 14% year-to-date, which easily beats the FTSE 100’s flat performance. However, they could be set for further rises because their yield continues to attract demand from investors and, despite such a strong showing this year, shares in SSE still yield a very impressive 5.7%.
With interest rates set to rise at a gradual pace, shares in SSE could see continued strong demand over the medium term due to their above-average (and growing) yield, with the company aiming to increase dividends per share by at least as much as inflation over the medium term.
Furthermore, SSE continues to offer good value. Indeed, shares trade on a price to earnings (P/E) ratio of just 12.9. This is less than the FTSE 100 P/E of 13.9 and highlights the company’s value, as well as income, potential.
Centrica
With around 40% of Centrica’s business being focused on exploration rather than the supply of domestic energy, its shares should perhaps be subject to less political risk than those of SSE. Shares in Centrica, though, are down 9% year-to-date as the company has undergone a period of instability with regard to its management team. Indeed, the company has seen both its Chairman and CEO decide to leave in the last year alone, as the company expects to report a decline in earnings per share (EPS) of 13% this year.
However, Centrica is forecast to bounce back in 2015, with the bottom-line expected to increase by around 10%. Allied to this is a continued strong yield of 5.6%, which is expected to grow by 3.6% next year, as well as a relatively attractive P/E of 13.6.
Although it may experience a few lumps and bumps along the way, Centrica appears to be a company with significant potential to deliver capital growth and a great income for investors over the long term.
