ii view: SSE – a green income play

Covid is impacting but increasing green credentials and dividend policy certainty outweigh.

Full-year results to 31 March 2020

• Adjusted profit before tax up 49% to £1.02 billion
• Adjusted earnings per share up 35% to 83.6p
• Final dividend of 56p per share 
• Total full year dividend of 80p per share
• Unchanged dividend policy going forward

Chairman Richard Gillingwater said:

"2019/20 was a year of progress for SSE.  Financially, there was a solid recovery from the previous year.  Strategically, we reshaped the Group with the sale of Energy Services and increased our focus on our core businesses of regulated electricity networks and renewable energy.  

"It is still too soon to predict with accuracy the full human, social, economic and business impact of coronavirus; but we have put in place a comprehensive plan to achieve the related objectives of sustaining the dividend payments which provides vital income for people's pensions and savings - income which is now more important than ever; and promoting the long-term success of SSE for the benefit of all its stakeholders.

"Climate change remains a critical issue and we see significant opportunities to create sustainable value for shareholders and society through contributing to a much-needed green economic recovery and supporting the transition to net zero emissions."

ii round-up:

Power generator and network operator SSE (LSE:SSE) today outlined plans to retain its current dividend policy going forward, while investing around £7.5 billion in green energy projects over the next five years. 

A final dividend of 56p per share for the year ending in March 2020 will be paid in September, making a total of 80p per share for the 12 months – in line with the previously rebased or reduced total it announced in 2018. 

Profit for the year after adjusting for the sale of its retail business to Ovo Energy back in September exceeded £1 billion, beating analyst estimates nearer to £950 million. 

SSE shares rose by more than 9% in early UK trading, having fallen by less than 5% year-to-date. Rival generator Drax Group (LSE:DRX) shares are down by over 20% in 2020. 

SSE plans now being implemented to both battle Covid-19 and help sustain the dividend payment, include cutting capital expenditure and raising at least £2 billion from asset sales by autumn 2021. 

The pandemic caused a near-£52 million hit to profits for the year passed given reduced electricity demand and rising customer bad debts. A further hit to profit for the year ahead of between £150 million and £250 million is now estimated. 

Given pandemic uncertainty, estimates or guidance on adjusted earnings per share will now be provided later in the year. 

The £7.5 billion planned green energy investments includes today’s confirmed investment decision for the 103-wind turbine Viking onshore farm. 

ii view:

Utility companies have historically proved attractive to income seeking investors. However, in recent years regulatory pressures have been building. Utilities have been suffering a backlash from both wage squeezed consumers and increased political party attention. 

SSE took the decision to cut and rebase its dividend back in May 2018, hopefully achieving a better balance between customers, the group’s finances, infrastructure investment and shareholder returns. Last year, the company placed its focus on renewable power generation and networks, selling its household energy supply and services arm for £500 million.

Now, with political uncertainty having lifted at the end of 2019 following the election of a majority government, the coronavirus has taken its place. 

For investors, payment of the 56p per share 2019 final dividend in September, and plans to pursue an unchanged dividend policy, ease previous concerns. A dividend for the current financial year in the region of an 80p per share total leaves the stock sitting on a projected income yield of over 5.5% (not guaranteed). Investments to further decarbonise the group and enhance its environmental credentials, arguably help counterbalance some Covid uncertainty. For now, and with many non-utility companies having suspended their dividend payments, it looks sensible for income seeking investors to stay put.    

Positives

• Becoming a clean-energy company
• Attractive dividend payment

Negatives

• Covid-19 raising demand and customer debt uncertainty
• Moody's previously downgraded SSE's credit rating 

The average rating of stock market analysts:

Hold