SSE’s dividend success simply not sustainable
WEDNESDAY saw two important announcements from SSE, one of the UK’s big six energy suppliers.
The first was half year results, where operating profit fell 8 per cent to £586million, mostly due to an expected fall in profitability in the networks business.
This is the part of SSE that handles the delivery of electricity and gas to 3.7 million businesses, offices and homes. The interim dividend rose 3.6 per cent to 28.4p, while the target of increasing the dividend by at least the rate of RPI inflation remains in place.
However, the main news was in the second announcement. SSE has reached an agreement with Npower owner Innogy to split off its consumer-facing division into a separate business. It’s easy to see the rationale for the deal, which still requires shareholder and regulatory approval.
SSE has been losing customer numbers at a sharp pace. Half year results showed a 410,000 drop, leaving the total at 7.7 million.
Political pressure for higher energy price regulation is also ramping up. Leading names from both sides of the political divide have moved to come down on the big energy suppliers, with standard variable tariffs a high-profile target for change. Of the major players, SSE has the highest percentage of customers on these tariffs, so it is perhaps no surprise to see it taking action.
While the move makes sense from a retail angle, this is only a small part of the group. The bulk of SSE’s profits come from the wholesale and networks divisions. With a new, tougher pricing structure coming in for networks, these businesses have their own challenges.
The group has an excellent record on the dividend, having increased the payout every year since 1992. The yield on offer at present is an attractive 6.9 per cent, but we feel the dividend is starting to look stretched.
In recent years, SSE has taken on debt and issued new shares to help keep the dividend going. Clearly this can’t continue forever. The goal for SSE post-split will be to shore things up by improving its cash flows in a more sustainable way.
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