Questor share tip: SSE protects 6pc dividends

SSE
£15.17+19.2p
Questor says HOLD

UTILITY group SSE outlined plans to protect the dividend for the next three years, following an announcement that it would freeze energy prices until 2016.

Mark Freshney, utility analyst at Credit Suisse, said the move “alleviates political risk for investors” and that the company had: “today manoeuvred itself ahead of politicians and competitors in the energy affordability debate by announcing a more than 24 month price freeze, better for consumers than the Labour party’s proposed 20 month price freeze.”

The company has said it will take a number of measures to protect dividend payments against weak power prices, falling demand and rising debts. A £1bn asset sale has been announced to reduce debt levels at the company.

SSE owns one-in-ten street lights across the UK and £500m will be raised by selling these lighting PFI projects, and a further £500 from the sale of wind farms.

This should reduce the net debt levels at the company that are forecast to hit £7.8bn by the year ended March 2014. The company paid out about £500m in cash for dividends in 2013 and the plans provide breathing room of about two years of payments.

Job cuts will deliver additional savings. SSE will cut about 500 roles alongside other efficiency savings that should reduce annual costs by £100m.

These measures have given the company room to sustain dividend payments. The company has said it will deliver a 3pc increase in the dividend to 87.7p, a yield of 5.8pc, for the year ended March 2014. The company has pledged to increase the dividend by “at least retail price inflation” for the subsequent two years.

In a statement SSE said that given the risks to earnings per share during the next three years the company was comfortable with dividend cover falling from the target range of 1.5 times to as low as 1.2 times. Consensus estimates are for pre-tax profits of £1.54bn, giving earnings per share of 122p for the year ended March 2015.

Peter Atherton, analyst at Liberum, said the company was “battening down the hatches” adding that: “in our view, it is a well designed package that should reassure investors that the company is proactively addressing its challenges and crucially shoring up its balance sheet to protect its all important dividend policy.”

The plans were well received by shareholders sending the shares almost 2pc higher in morning trade. SSE shares have risen by 11.5pc so far this year, compared the wider FTSE 100 down by 1.4pc. However, the shares are still below the £15.80 level last October when Labour leader Ed Milliband proposed a prize freeze.

SSE shares have had a strong start to the year, and now trade on an adjusted forecast earnings ratio 12.6 times, falling to 12.3 times next year. The most attractive element is the forecast dividend yield of 6pc, and management have said the dividend growth will beat inflation for the foreseeable future. The company has taken measures to reduce political risk, however, shareholders remain exposed to a fall in the share price if earnings fall. On balance the rating looks reasonable for now, hold for income.