The SSE (LSE:SSE) share price tumbled this morning by over 11% at the time of writing. What’s going on? Well, there are reports that Chancellor Rishi Sunak is considering a windfall tax on electricity generators in addition to oil and gas producers.
Soaring gas and electricity bills are putting pressure on the government to provide assistance to struggling households. One way for the government to raise some funds is via a one-off tax on excess profits generated by energy companies.
Taking the wind out of its sails
Russia’s war in Ukraine has led to soaring energy costs. And oil and gas firms have benefited from these higher global energy prices. But government estimates suggest electricity producers could have made more than £10bn in excess profits too, according to the Financial Times.
As one of the largest electricity network companies in the UK, SSE would highly likely be affected by this tax if it was implemented. Whether the windfall tax is a good idea is up for debate though.
SSE is a leading generator of renewable electricity, and it’s investing heavily in offshore wind to help Britain reach its net zero climate targets. Just last year, it boosted its investment plan to spend £12.5bn up to 2026.
But any significant windfall tax on SSE could reduce future investment. That could potentially have the unintended consequence of higher electricity prices in the future.
Where next for the SSE share price?
So what does it mean for the SSE share price? The Treasury said that no decision has been made for the windfall tax. It’s still possible that it doesn’t go ahead. And even if it is implemented, there’s a chance that it’s watered down at a later date. That’s exactly what happened in Spain last year.
As such, I reckon an 11% fall in the SSE share price is an overreaction. And despite the 20% gain in share price over the past year, the shares represent good value to me. SSE is one of the best renewable energy stocks I can think of.
It’s an established and mature business with a 4.5% dividend yield. It also has a shareholder-friendly dividend policy that has resulted in 29 consecutive years of payments. I value this level of reliability when looking at dividend income.
It’s also a profitable company with a double-digit return on capital employed (ROCE) – a key measure of business quality, in my opinion. Earnings are growing and it operates in an area of national focus.
Taking the long view
That said, being in the limelight has its downsides. A windfall tax could negatively affect SSE’s earnings in the near term. So a fall in the share price is justified to some extent.
But I just think 11% is too much. As such, I would consider buying the shares today for a long-term holding. As more tax-related updates appear over the coming days and weeks, its share price could possibly remain turbulent.
Yet as a longer-term investor, I’m more interested in how the shares perform over many months and years. And I’m willing to bet that in a few years, they’ll be higher than they are today.
