ii view: SSE raises 'green' spending as dividend cut

It's defying activist calls to split the business and is ramping up renewable investment. We assess prospects. 

First-half results to 30 September 2021

• Adjusted pre-tax profit up 30% to £174.2 million
• Intention to recommend an interim dividend of 25.5p per share
• Plans to invest £12.5 billion in green capital expenditure

Guidance:

• Expects to recommend a full-year dividend of 81p plus RPI inflation, in line with existing policy
• Plans to rebase the annual dividend to 60p per share in the financial year 2023/2024

Chairman Sir John Manzoni said:

"Over the past months the Board of Directors has carefully considered a range of strategic alternatives for the next phase of SSE's growth and development. Having reviewed all options and taken independent advice, this resulting strategic update significantly accelerates growth in our core businesses, whilst providing efficient and competitive sources of financing and ensuring SSE continues as a reliable and resilient operator of critical infrastructure.”

ii round-up:

Renewable power generator SSE (LSE:SSE) today announced plans to increase its investment in green energy as it reported a 30% improvement in adjusted pre-tax profit to £174 million. 

Contrary to recent speculation regarding a separation, SSE is to both keep and invest an additional £12.5 billion up until 2026 in its renewable energy assets. The 65% step-up in capital expenditure is the equivalent of an extra £1 billion a year on top of existing planned investments. 

Although staying with its existing five-year dividend policy, including plans to pay a total dividend this year of 81p plus RPI inflation, it will then rebase, or cut the annual payment to 60p per share from the financial year 2023/2024, with annual growth of at least 5% to March 2026. 

SSE shares fell 4% in UK trading, leaving them up by around 18% over the last year. That compares to gain of almost 15% for the wider FTSE 100 index and a rise of under 5% for National Grid (LSE:NG.). 

Rising profit for SSE’s gas storage business helped to offset a fall in weather hit renewable energy output and earnings. Accompanying management comments pointed to strong start to the second half of the year, aided by above plan renewable output in October. Subject to weather conditions, current full-year earnings per share are expected to match existing analyst forecasts of around 83p. 

Funding for the increased renewable investment will by aided by minority stake sales in its traditional transmission and distribution businesses. 

ii view:

SSE operates both regulated UK energy networks, accounting for around half of its earnings, and renewable generation making up most of the balance. Around 10% still comes from non-renewable generation, energy supply and other related energy services. The company is now the UK’s biggest renewable energy generator, with investment and new windfarm construction ongoing. Operations overseas also continue to grow. 

For investors, today’s latest strategy update sees the company rejecting activist investor calls to split the group into a renewable and non-renewable businesses. Such a move could have seen a higher valuation placed on the renewables business. But performance over recent months has been hindered by unexpected weather lowering renewables output. The refocusing of the oil majors such as BP (LSE:BP.), Royal Dutch Shell (LSE:RDSB) and TotalEnergies (EURONEXT:TTE) on renewable energy sources also adds to the competition and, potentially, the price of buying new assets.

That said, SSE remains the UK’s biggest renewable energy generator, now with additional plans to grow. Retaining the diversity of its traditional operations will help to continue balancing out the volatility of its renewable output. The current dividend policy leaves the shares sat on a historic and forward yield of around 5%, with the pending rebased policy still leaving the shares on a yield comfortably over 3%. In all and given its strong green credentials and attractive dividend returns, SSE looks to remain worthy of ongoing investor support.     

Positives

• Expanding renewable clean energy
• Attractive dividend payment (not guaranteed)

Negatives

• Subject to regulatory rulings
• Growing renewable energy competition  

The average rating of stock market analysts:

Buy