ii view: energy giant SSE remains dividend favourite

A growing array of renewable energy assets and a dividend yield of around 5%. We assess prospects. 

Full-year results to 31 March

Chairman Sir John Manzoni said: 

"Thanks to the commitment of employees right across the business in 2020/21 we made an important contribution to the national pandemic response, delivering strong operational performance, and making significant strategic progress.

"We have also made significant progress on our non-core disposals programme, creating value for shareholders while continuing to sharpen the group's strategic focus on its low-carbon electricity core in networks and renewables, where our capital investment programme is progressing well.

"Looking ahead, a strong balance sheet, underpinned by world-class assets, gives us a firm footing from which to capitalise on the considerable future growth opportunities we are creating in the transition to net zero."

ii round-up:

Power generator and network operator SSE (LSE:SSE) today raised its dividend in line with inflation and reported a 1% improvement in adjusted operating profit £1.51 billion. 

A final dividend of 56.6p per share brings the total payment for the year to 81p per share, up 1.2% and adhering to its five-year retail price index (RPI) linked dividend policy to March 2023. Adjusted earnings per share up 5% year-over-year to 87.5p broadly matched analysts’ forecasts.

SSE shares were little changed in UK trading, having risen by over 40% since pandemic lows in March 2020. Shares for fellow utility company and British Gas owner Centrica (LSE:CNA) are up by more than 35% over the same time, while shares of National Grid (LSE:NG.) have climbed by nearly 20%. 

The hit to SSE’s operating profit from the pandemic, given reduced business demand under lockdowns, came to an estimated £170 million, at the lower end of management’s previous guidance and down from an earlier year forecast of around £250 million. 

Reported operating profit rose by 185% to £2.74 billion, helped by SSE’s ongoing push to sell non-core assets under its climate change strategic shift programme commenced back in June 2020. Over £1.4 billion of proceeds received to date had generated nearly £900 million of exceptional net gains. 

SSE remains on track to invest £7.5 billion in renewable energy assets by 2025 with construction continuing at projects including the world's largest offshore wind farm at Dogger Bank in the North Sea. 

Management gave no guidance or financial estimates for the year ahead given the ongoing pandemic, but underlined its commitment to its current dividend policy to March 2023. 

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 construction currently underway at projects including Seagreen off the coast of Scotland and its Viking wind farm onshore  the Shetland Isles. 

For investors, pandemic disruption is now added to the more usual bad weather disruption which SSE can suffer. The refocusing of the oil majors such as BP (LSE:BP.), Royal Dutch Shell (LSE:RDSB) and Total (EURONEXT:FP) on renewable energy sources also adds to the competition and potential price of buying any new assets. 

But SSE has been early to adopt renewable energy generation, with its assets now growing via a major £7.5 billion investment programme. Management now expects to exceed its target for trebling its renewable output by 2030. A historic and estimated forward dividend yield of just over 5% is also difficult to ignore in a world of ultra-low interest rates. In all, and given its strong green credentials and still highly attractive dividend return, SSE looks to remain worthy of ongoing investor support.     

Positives

• Expanding renewable clean energy
• Attractive dividend payment

Negatives

• Subject to regulatory rulings
• Growing renewable energy competition  

The average rating of stock market analysts:

Buy