SSE Has the Power to Deliver

By Robert Sutherland Smith

This afternoon I opened up my laptop to discover a surprise: the share price of energy share SSE – which used to be known by the more picturesque and memorable name Scottish and Southern Energy (men in kilts and bowler hats Morris dancing) – had fallen by nearly 12p (0.77%) to 1547p.

The surprise was occasioned by the fact that the competition agency had published a report seeming to find no fault with energy companies over pricing apart from the central conclusion that they are singularly bad at rewarding loyalty, invariably giving best prices to new customers. The fault it seems is with the customer who does not switch. Their scepticism being too deep to really believe that you get too little gain for the effort of the process. The men in kilts and bowler hats have clearly done a good job in softening up the enterprise of cynical customers. 

I noted that the share price had performed well in 2014 having moved up 24% from a price of 1369p in February 2014 to a peak of 1695p in December 2014. Since then it has come down to 1547p last seen. It had risen despite all that Ed Miliband had thrown at the sector. It was thus I presumed a case of the market buying on the bad news and selling on the good news – or at least in anticipation of it. It’s an old maxim: buy/sell on the rumour and sell/buy on the event. Clearly the psychology had been influenced by the promised price cuts a few weeks ago, taking some of the steam out of situation.    

So what do you get if you buy SSE shares now?

First, an interesting looking chart position! Arguably, the share price is not too far off what looks like a support level at or near 1500p, suggesting in that case that share price downside may be limited and followed by a bounce. So what is in the fundamentals to give credence to such a prospect?   

First and foremost is the dividend of course. Between 2014 and 2017 the market consensus of energy broker estimates is for a modest top line increase in revenue for SSE. That is to say a 4.2% increase in sales from £30.58 billion to £31.83 billion in the three years to 31st March 2017. That is a modest assumption; one that looks conservative enough. That leads to the expectation of a forecast fall in earnings of 4% estimated for the year just about to end in March 2015, and a further fall of 3% the following year followed by a 1% increase in earnings per share in 2016/17. That translates into earnings estimates of 118.5p, 115.11p and 116.11p, putting the share on an estimated forward price to earnings ratio of 12.9, 13.4 and 13 times.      

Crucially, the consensus also estimates that dividends will continue to grow throughout that period, putting the share on a prospective estimated dividend yield of 5.7% for the year beginning 1st April 2015 to an estimated 6.0% for the year ending 31st March 2017. That looks like a good income return.