As an old-school value, income, and dividend investor, I’m always on the lookout for cheap UK shares. Ideally, I’m looking for stocks trading on low price-to-income ratios that offer market-beating dividend yields. And in early October, the share price of energy company SSE (LSE: SSE) popped up during one of my routine FTSE 100 stock screens.
The SSE share price leaps 20%
At their 52-week low on 13 October, SSE shares slumped to an intra-day low of 1,405p. That was more than a quarter (-27.4%) below their 52-week high of 1,935.5p on 18 May 2022. Alas, as so often happens, my attention was elsewhere, so I failed to spot this excellent buying opportunity. Oops.
As I write on the afternoon of the first trading day of the year, SSE stock trades at 1,693.5p, down 19p so far in 2023. This values the Perth-based generator of renewable energy at £18.3bn, making it a FTSE 100 stalwart.
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Hence, since its October low, the SSE share price has surged by more than fifth (+20.5%). After such a strong rebound in under 12 weeks, has this widely held stock gone too far, too fast?
One problem for SSE is that the government has announced a windfall tax on ‘excess profits’ made by power generators. This levy does apply to low-carbon electricity generation, which will hit SSE’s offshore wind farms. However, SSE makes the vast bulk of its profits from thermal and gas storage, which is good news. Indeed, analysts forecast SSE’s full-year operating profit at around £1.9bn, versus £1.2bn for the prior year.
SSE looks fairly cheap to me
At the current share price, SSE shares trade on a modest price-to-earnings ratio of 10.9, for a healthy earnings yield of 9.2%. What’s more, the dividend yield of almost 5.3% a year is covered around 1.75 times by earnings. This gives SSE one of the best yields on offer among FTSE 100 firms. However, I won’t be buying SSE stock today for two reasons.
First, the group has net debt exceeding 90% of its market capitalisation. In other words, the company’s debt pile is almost as large as its equity valuation. Then again, I don’t see this as a big deal-breaker, given that SSE operates in a highly regulated market with acute government oversight.
Second, I don’t see the SSE share price shooting out the lights at any point in the near future. Barring any unexpected surprises (such as a successful takeover bid or merger), I see this as a ‘slow and steady’ share, rather than the next super-stock.
With plenty of similar high-yielding shares in my family portfolio, I’ll look elsewhere for more excitement. That said, I do expect this stock to be a solid (if unexciting) performer in the years ahead!
