Finding companies in the FTSE 100 offering huge dividend yields isn’t a problem right now. Finding companies that are absolutely guaranteed to maintain these bumper payouts? That’s arguably a little more challenging.
Today I’m turning my attention to FTSE 100 utility giant SSE (LSE: SSE) and its latest full-year numbers for the year to the end of March. With a merger and tariff caps on the horizon, should income investors stick with the company?
Profits down
In line with its statement on 29 March, adjusted pre-tax profit fell 6% to £1.45bn thanks in part to an increase in capital expenditure.
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On a reported basis, pre-tax profits sank just under 39% to £1.09bn after last year’s numbers included the sale of its minority stake in Scotia Gas Networks (SGN).
Commenting on results, Chairman Richard Gillingwater reflected that the last financial year “presented a number of complex challenges” for SSE which are likely to continue into 2018/19. He did, however, go on to emphasise that today’s numbers were ahead of those expected when the year began.
Looking ahead, the next financial year is likely to be dominated by the proposed merger of its household energy business with peer Npower. If given the green light by the competition watchdog, the deal will complete in Q4 of 2018 or Q1 of 2019.
The likely introduction of a temporary cap on standard variable tariffs by the government later in the year — designed to protect vulnerable people from high energy bills — will be another hurdle to overcome, particularly as a relatively large proportion of its customers are on such tariffs.
On top of this, the £14bn cap energy juggernaut also expects to devote approximately £1.7bn to capital expenditure in 2018/19, rising to “around £6bn” in total over the next five years.
Given the above, it’s unsurprising if the majority of SSE’s owners were focused on the short-to-medium term outlook for dividends provided in today’s report.
Safe for now?
At 94.7p per share, today’s recommended full-year payout was 3.7% up on the previous year and covered 1.28 times by profits. While unlikely to raise pulses, this hike was more than that seen in recent years and should provide some reassurance that dividends are safe for now.
In the next financial year, SSE has stated that it will be recommending a full-year return of 97.5p per share — a 3% increase on 2017/18 and “broadly in line” with inflation. The payout will then fall to 80p per share in 2019/20 “to reflect the impact of changes” at the company. For the next three years (to 2022/23), dividend increases that “at least keep pace” with retail price inflation are expected.
While the guidance on dividends was useful, that fact that SSE’s shares were flat in early trading this morning suggests that the market greeted today’s report with something approaching apathy. The lack of price action means that shares continue to trade on 12 times earnings — not dissimilar to top-tier rival Centrica.
While I certainly wouldn’t begrudge anyone holding a traditionally defensive utility stock as part of a fully diversified portfolio, I continue to believe that the hyper-competitive nature of the energy market — SSE lost 430,000 customers over the reporting period — and susceptibility to political interference means there are far more tempting opportunities elsewhere in the FTSE 100 right now.
SSE’s holders needn’t sell up after today’s news, in my opinion, but nor should buyers rush in.
