The SSE share price is soaring! Should I buy shares now?

After the news broke of an activist fund buying shares, the SSE share price is moving higher. Jonathan Smith talks about what it means.

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The SSE (LSE:SSE) share price is up over 10% over a one-week period. Given that the stock is meant to be a fairly low-volatility energy share, this is quite an eyebrow-raising move. It’s a share that has been on my watch list for a while now, largely due to the dividend potential. Yet if the stock can offer me share price appreciation as well, that’s an added bonus! So what has happened?

A new large shareholder

News broke a couple of days ago that a large hedge fund has been buying shares in SSE. Elliott Management is the fund involved, although we don’t know exactly the size of the holding it bought in SSE. 

This was taken as a positive for the SSE share price. As we’ve seen recently, private equity and hedge funds have shown an interest in several FTSE 100 companies. At the moment, Morrisons is in the process of receiving bids from private equity firms.

The Morrisons share price jumped significantly when rumours of a deal started to surface. The price tends to move towards the anticipated offer level, which makes sense. 

It remains to be seen whether the shares bought by Elliott Management are part of a larger buyout strategy, or simply a position it intends to hold as it thinks the shares are undervalued. However, I do also see a risk here. The fund is known as an activist investor. This term is used to describe funds that buy shares in order to change the company or influence decisions.

With enough of a stake, the fund could force SSE to sell off divisions, appoint new directors or put other pressures on it. This is usually done to try and boost the economic value of the firm, increasing the share price. 

Caution with the SSE share price

I have conflicting views on the above news. Although I think it’ll be good for the SSE share price, it’s an aggressive way to do business. It could result in forced job cuts and other unpleasant requests simply to boost the value of the company.

Only time will show what the aims of Elliott Management are. If I put this to one side, I am positive on the SSE share price. At just over 1,600p, it’s still a way off the highs seen last year, giving further scope to grow.

Also, as an income-driven investor, the dividend yield of almost 5% looks very attractive. The energy business is sustainable too, and good levels of liquidity should support the dividend being paid well into the future.

In terms of risks, I think Elliott Management putting on the corporate raider cap is the biggest one. This could see my dividends dry up in order to put the money to use elsewhere. Also, just because the fund could put pressure on management, it doesn’t mean it’s right to do so. Poor decisions could rock the boat of a perfectly well run company (in my opinion).

Overall, I’m still positive on SSE shares and would look to buy them now. However, I need to keep a careful eye on what this new shareholder plans to do going forward.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

jonathansmith1 has no position in any share mentioned. The Motley Fool UK has recommended Morrisons. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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