Centrica (LSE: CNA) and SSE (LSE: SSE) are two of the UK’s largest utility companies while Utilitywise (LSE: UTW) is an industry upstart that’s growing rapidly.
Indeed, City analysts expect Utilitywise to report earnings per share growth of 18% for full-year 2015, followed by growth of 40% during 2016. But forecasts suggest that Centrica’s earnings per share are set to fall 7% this year, before rising 1% during 2016, whilst SSE’s earnings are projected to fall by 11% for the full year 2015.
Nevertheless, when it comes to dividends, SSE and Centrica are unbeatable. For example, SSE’s shares currently support a dividend yield of 5.8% and Centrica’s shares currently yield 5.6%. Both payouts are covered one-and-a-half times by earnings per share.
Dividend champions
As a reliable dividend-paying stocks, you can’t do much better than SSE and Centrica.
Due to the nature of their businesses, the two companies have a certain degree of clarity over revenue streams. As a result, it is unlikely management will suddenly take an axe to the dividend. That being said, Centrica did announce a dividend cut earlier this year, but many analysts were expecting the company to make such a move after Centrica’s misguided expansion into the oil & gas market.
Now, Centrica’s dividend payout looks safe for the time being. Payout cover has increased by 30% since the beginning of the year, and the company is curtailing its exposure to the volatile oil & gas market.
Still, SSE and Centrica aren’t going to make you a millionaire overnight. Although, the two companies are steady, defensive bets that should have a place in any investor’s portfolio as a backbone from which to build the rest of the portfolio around.
Complex accounting
Utilitywise is a growth play that’s only suitable for investors who are willing to take on the extra risk. But while Utilitywise has the backing of the City’s star fund manager Neil Woodford, I’m not convinced the company has a bright future.
It is Utilitywise’s aggressive accounting methods that concern me. Utilitywise is booking revenue up to three years in advance, assuming that its customers will remain with the company and extend contracts for the duration of the period.
As Utilitywise’s targeted customer is the small-and-medium-sized enterprise, this is an especially risky strategy. Around 10% of the business in the UK “die” every year, which indicates that a number of Utilitywise’s customers will go out of business at some point during their three-year contract. Utilitywise will, at some point, be faced with writedowns on the value of already booked revenue. Chasing revenue growth through aggressive accounting over sustainable quality growth is never a good idea.
On the other hand, both Centrica and SSE are stable businesses, with massive, diversified customer bases that aren’t using aggressive accounting techniques to book revenue. Moreover, Utilitywise won’t appeal to income investors as the company’s shares only offer a yield of 2%.
