The SSE (LSE:SSE) share price has moved like a roller-coaster over the last 12 months. But overall, it’s been moving upwards. And is now trading close to its pre-pandemic levels. But can the stock continue to climb? And should I be adding this business to my portfolio?
The wobbly SSE share price
Demand for residential gas and electricity increased significantly last year. After all, lockdown restrictions forced most individuals to stay at home. But they also forced non-essential businesses to close their doors. And consequently, the level of unemployment rose sharply.
For individuals unable to continue working from home, their level of household income declined, making keeping up with utility bills quite challenging. Ofcom, the UK energy regulator, imposed new price caps on energy tariffs to mitigate this impact.
Unfortunately, these price limitations put a considerable amount of pressure on profit margins. The SSE share price suffered for it. Overall, the total financial impact from Covid-19 on the business is expected to be between £150m and £200m, according to the management team.
Despite this, based on its half-year report, the company is actually performing relatively well. At least, I think so. The operating profit of the business increased, even after ignoring the additional £327m gained from the disposal of some non-core assets. And the firm continues to progress with its £7.5bn transition into renewable energy sources.
Combining all that with no expected cuts to demand or shareholder dividends does make SSE seem like a promising income stock to own. But I have some concerns.
Risks to consider
Based on the latest financial results, the company currently has around £10bn of debt on its balance sheet. As a result, around 65% of the firm’s capital structure currently consists of debt. This isn’t unmanageable. But it is quite a significant chunk of leverage that is eating up around a third of operating profits from interest payments alone. And while it is set to raise £2bn through its disposal programme, it could take several years to bring down this level of leverage.
This is particularly concerning as the firm is in the middle of the aforementioned expensive transition into renewable energy. Should creditors deem the business overburdened with loans, it could put the brakes on SSE’s future growth and its share price as well.
Bottom Line
With the UK economy slowly reopening and people returning to work, the affordability of household utilities is back on the rise. And so, Ofcom has already begun lifting the price caps on energy tariffs.
I have some reservations over SSE’s level of debt. However, based on current performance, I think the company can return to its pre-pandemic levels of profitability as well as maintain its 5.4% dividend yield. And so, SSE is a company I would consider adding to my income portfolio even after the recent increase in its share price.
