The SSE (LSE: SSE) share price has risen by 20% from November’s lows. City analysts have upgraded their profit forecasts for the FTSE 100 utility based on strong trading, and investors have bought into the good news.
SSE’s forecast dividend yield of 5.5% may also have attracted buyers looking for a market-beating income. Unfortunately, this payout may not be as safe as it looks, despite the company’s rising profits.
I’ve been taking a fresh look at SSE shares to see if I think they’re worth buying today. Here’s what I’ve decided.
Earnings rising, sunny outlook
There’s no doubt that the outlook for this business has been improving. In January, SSE said that high energy prices and strong performance from its gas generating business meant that profits for the year would be ahead of previous forecasts.
This bullish outlook was maintained even though calm winter weather meant that the group’s wind farms generated less power than expected.
As a result, the company now expects adjusted earnings of at least 150p per share for the year ending 31 March. That’s a 25% increase on the previous guidance (in November) for at least 120p.
These numbers price SSE shares on 12 times forecast earnings, which does not seem too expensive to me. However, there are a couple of things to watch out for.
Hey, big spender!
SSE is already the UK’s largest renewable energy generator, but the company is planning to invest heavily to expand its capacity over the coming years.
One focus will be upgrading its transmission network so that wind power can be transferred from the north of Scotland to locations further south, where demand is higher.
The company is also investing in capacity to support another 50GW of offshore wind farms by 2030. At the moment, there’s a general shortage of capacity to connect up new wind farms.
SSE expects to invest a total of £12.5bn in net zero projects between 2021 and 2026 — around £2.5bn each year.
This big spending means that even though profits are looking healthy, cuts might be necessary elsewhere.
Dividend cut next year
One cut that’s almost certain is SSE’s dividend. For some time now, the company has been warning investors that the payout will be cut to a new base level of 60p per share for the 2023/24 financial year.
To put that in context, the expected dividend for 2022/23 is 85.7p per share. A reduction to 60p is equivalent to a 30% cut.
For what it’s worth, I think the cut is probably sensible. SSE needs to invest, and the company’s capacity to take on extra debt is limited. A dividend cut is the right option, I think.
However, shareholders are going to face a big reduction in income.
This year’s planned payout of 87.5p gives the stock a 5.5% dividend yield at current levels.
Next year’s expected 60p payout would cut that yield to just 3.5%.
I think SSE is a good business, but I feel the shares are probably fully priced at over 1,700p.
My guess is that there will be better buying opportunities over the next 12 months, perhaps when energy prices return to more normal levels.
