A stock in one chart: SSE's dividend issue

Former City analyst Phil Oakley believes the fortunes of many companies can be summed up in a single financial chart. This week it's SSE.

Over the last twenty years or so, utility company SSE has been one of the most reliable shares out there. Through the ups and downs of the economy and the stockmarket, this owner of power stations, electricity pylons and gas networks - as well as being one of the biggest suppliers of gas and electricity- has paid a bigger dividend to its shareholders year after year.

But could this stellar record of dividend growth be coming to an end?

Not just yet. The company has promised to keep increasing its dividend in line with inflation until 2021 but there are grounds for suggesting that this is putting a strain on the company's finances. Its dividend growth may not be sustainable after then.

If you look at the chart below, you can see that the rate of annual dividend growth has been shrinking so that it is hardly growing at all. At the same time, SSE has been investing heavily in new assets and has seen its debts rise significantly. The company's dividend has not been covered by its free cash flow since 2007.

SSE has been able to finance all this extra borrowing at very low interest rates, which has been good news for shareholders up until now. The big risk in the future is that its regulator might take this into account when setting the prices SSE's electricity and gas networks can charge its customers.

If interest rates stay low and the prices SSE can charge are cut then its dividend may have to be cut. This is what happened with some water companies back in 2010 and some electricity companies such as SSE may face this risk in the future.

SSE has a big dividend yield of 5.8%, but doubts about its future dividend growth may hold back its share price.

The ii view:

SSE has been losing retail customers to smaller and cheaper suppliers, and Theresa May's new government has also voiced concerns about the "dysfunctional" retail energy market. That raises the risk to power providers of further policy proposals or reforms.

First-half results on 9 November will confirm adjusted earnings per share of around 33p, although they're still tipped to beat 120p for the 12 months. A forward price/earnings ratio of 15 times is a big discount to other utilities, and a prospective yield of almost 6% is higher, reflecting additional perceived risk.

Read more from Phil Oakley here. Financial charts are a feature of SharePad, the web-based service from ShareScope. Voted UK's Best Investment Software 2015. For a limited period, you can get a three month subscription to SharePad for just £25.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.