One of the largest energy companies in the UK, SSE (LSE: SSE) has seen a 25% plunge in its share price over the past eight months. Since its all-time high, printed in December 2014, the shares have now lost a total of 30% excluding dividends.
Clearly, this is a disappointing result for shareholders as SSE is considered to be one of the FTSE 100‘s most defensive stocks as it is a diversified utility provider. It generates and sells power, supplies UK households with energy and provides telecommunications services. It is the only UK energy company that has retained its telecoms arm.
The problem is that despite the firm’s best efforts, rising competition and political interference are damaging its prospects. Specifically, right now investors and analysts alike are worried about what impact the legislation to introduce a cap on expensive “standard variable tariffs” will have on it.
Around 71% of SSE’s customers are on this type of deal, more than any other utility, meaning that it is more exposed than all of its peers. To try and limit any impact the caps might have on the business, management has reportedly opened discussions about merging and spinning off its UK household supply operations with those of rival Npower. Before it can undertake any action, however, it must first get the green light from regulators.
Time to buy or time to sell?
So what does all this mean for investors? Well, it looks as if SSE’s earnings are going to come under pressure. The firm has reduced its earnings target for fiscal 2018 from around 125p this time last year, to between 116p and 120p. However, it has also said that it still expects to report an annual increase in its full-year dividend for 2017/18 that “at least keeps pace with RPI inflation.“
To help stave off some of the impacts of a price cap, management is also investing in its telecoms business. During November, Thames Water struck an agreement with SSE Enterprise Telecoms to open up its Victorian-era tunnels to telecoms lines, a development which should allow it to surpass BT and offer better services to clients. Apparently, it is 60% cheaper and 10 times faster to use a tunnel rather than digging up roads.
Still, there’s an air of uncertainty that’s hanging over SSE, and the market does not like it. What’s more, it seems as if there’s a general dislike of income stocks at the moment. Higher yields on bonds are leading investors out of defensive stocks like SSE and its utility peers back to fixed income, which carries less risk. This is terrible news for share prices but great news for income seekers who have a long-term outlook and want to pick up a high-single-digit dividend yield. Indeed, right now the shares support a yield of 7.9% and the shares trade at a P/E ratio of only 10.2.
The bottom line
Overall, I believe that even after the recent decline, shares in SSE remain an excellent income investment. If the company can convince investors that its payout is sustainable, the sell-off should end at some point, and the shares will recover. Until then, investors can pick up a 7.9% dividend yield while they wait.
