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magazineThree reasons to like SSE
There are three compelling reasons to buy shares in FTSE 100 energy supply business SSE (SSE): yield, renewable growth and power generation upside, plus its inflation-busting properties.
The utilities team at UBS believe there is scope for the stock to rally more than 10% on their base case investment scenario. If sector dividend yields return to their average levels before the recent bond market correction then the investment bank sees upside of 21%.
Bullish stance
The UBS analysts are not alone in their positive assessment of SSE. While 10 of the 19 analysts that follow the stock retain a neutral stance, eight of the remaining analysts currently rank the shares as a ‘buy’, with just a single City number cruncher recommending the stock as a ‘sell’, according to Reuters data.
As we explained on 2 December, European utilities stocks are substantially down since September as rising bond yields have taken the shine off a strong run for the sector in recent years.
SSE is among the wider utility industry to experience a drag on its share price. The stock has declined around 5% since the end of September but almost 8.5% since recording 2016 highs of £16.28 in late July.
Income commitment
Income is an unsurprising feature of UBS’s analysis. SSE ‘has a track record of delivering dividend increases at least in line with RPI, and in our view, commitment to this policy is likely to remain strong,’ it notes. RPI is the retail price index, a representative basket of goods used as one of the Bank of England’s key measures of inflation.
Around 80% of SSE’s net income has some level of inflation defence built in, making its RPI-beating payout policy appear sustainable in the medium-term.
According to consensus data from Reuters, SSE is forecast to pay a 91.2p per share dividend this year to 31 March 2017. This implies a dividend yield of 6.1% based on the current £14.91 share price, versus the sector average 5.8% yield, or a 4.35% average for the FTSE All-Share index.
New clean electricity generation is also coming on stream that points to the group’s largest ever renewable pipeline. This includes circa 1GW of wind projects in construction and another 2GW to 3GW further pipeline options, says UBS.
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