SSE (LSE: SSE) shareholders could be in line for a modest windfall following an agreement to sell a 16.7% stake in its Scotia Gas Networks distribution business to the Abu Dhabi’s sovereign wealth fund. The sale, priced at a premium of more than 40% on its regulated asset value (RAV), would raise proceeds of £621m, making a capital return to shareholders likely.
But an announcement has yet to take place. And now investors will need to wait until 9 November before knowing whether they would be getting their hands on the proceeds of the sale.
Fledging share price
An announcement in favour of special dividends or share buybacks could have a big impact on SSE’s flagging share price. Amid concerns about falling wholesale energy prices and intense competition in the retail market from smaller challengers, such as the likes of First Utility, Ovo Energy and Good Energy, shares in SSE have gained just 3.5% year-to-date, compared to an 11.9% rise in the FTSE 100.
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SSE is selling its stake in the distribution network to focus on higher growth parts of its business. As gas demand in the UK has fallen by around a fifth over the past decade, management believes better growth prospects lie with its regulated electricity networks. Meanwhile, strong global investor demand means valuations are ripe for the company to realise value on its past investments.
What’s more, the sale still leaves SSE with an RAV of more than £7bn. And this is expected to rise to £10bn by 2020, given planned investments in its electricity distribution network. This implies that, going forward, more than half of the group’s profits would still come from the more stable regulated businesses. This would help the company to reduce the earnings volatility coming from its power generation and retail businesses.
Unless wholesale energy prices deteriorate markedly, SSE’s regular dividends seem sustainable given its dividend cover of 1.3 times. The utility currently yields 5.7%, and has also pledged to raise its dividends annually by at least RPI inflation.
Similar move
In a similar move, National Grid (LSE: NG) is looking to sell a majority stake in its own gas transmission network. Worth up to £11bn, the sale could lead National Grid’s shareholders to get a windfall which would dwarf any payout that SSE shareholders may get.
Due to the much greater size of National Grid’s gas distribution network, city analysts expect part of the proceeds would be used to pay down some of the group’s debts, with the remainder being used to fund a special dividend or share buybacks.
The last time National Grid embarked on a massive share buyback programme was back in 2007-8, when it returned £1.8bn in cash from the sale of its UK wireless business. Personally, I think this indicates a share buyback would be the company’s preferred method of returning cash to shareholders this time as well. After all, buybacks reduce the company’s outstanding share count, which would cut the cost of paying dividends in coming years.
Shares of National Grid have significantly outperformed those of SSE — they’re up 12.5% in the year-to-date and currently yield 4.1%.
