Dod101 wrote:The one thing they have not clarified is whether the reduction in the dividend in a couple of years is to reflect the actual lost earnings once the new company is spun out or whether it includes an element of rebasing as well. I would expect the latter because SSE's finances have been looking a bit stretched for some time now.
The results do give "reported operating profit" figures for each of the company's three main segments:
Wholesale: £403.1m
Networks: £669.6m
Retail: £328.0m
So Retail accounts for £328.0m/(£403.1m+£669.6m+328.0m) = 23.4% of reported operating profits, and so one would expect that in a demerger of Retail, around 23.4% of earnings would go into the demerged company and around 76.6% into what's left of SSE, and that the two companies' dividends would reflect that. The planned dividend figures in the results show 2019/2020 dividends equal to 80p/97.5p = about 82.1% of 2018/2019 dividends, noticeably higher than 76.6%, so the results suggest that if anything, there's an element of growth in their 2019/2020 dividend plans, not of rebasing.
That's only an approximate idea, for various reasons - e.g. the various accounting steps from operating profit to earnings probably don't treat the segments identically to each other, and the company they're planning to demerge may not be exactly the same as their Retail segment. But it says that their dividend plans are in the right ballpark for reflecting actual lost earnings, and probably continued underlying dividend growth in line with their current in-line-with-RPI dividend policy.
And if there is nevertheless somehow an element of rebasing in the announced plans, it's clearly a pretty small one, and in particular too small to make any significant difference to how stretched the company's finances are. Which would make it rather pointless... Basically,
if SSE deliberately cut their dividend in an effort to make their finances less stretched, I would expect the cut to be a substantial one, of say at least about 25%. Smaller reductions in companies' dividends than that almost always turn out on investigation to have some cause other than a deliberate cut, such as currency exchange effects, rights issue adjustments or following a formula-based dividend policy (e.g. Sainsbury's policy of setting their dividend to make dividend cover = 2). And the reason for that is pretty obvious: if you're a director and you're forced to make yourself unpopular with shareholders with a dividend cut, you might as well do so in a big enough way to avoid having to do it again (*), and preferably also big enough that you can restore your popularity with a return to dividend growth as soon as possible.
(*) When looked at on an annual basis, that is. Just about everyone expects that if a company cuts its interim or final, the following final or interim will be cut in proportion, and so doing that won't generally be considered to be "doing it again".
Gengulphus
