SSE - an opportunity too good to miss?

[Wizard]

SSE at c.1300p is at a share price not seen since 2012, however, with the dividend having risen every year the yield is higher than it has ever been this century at more than 7%. Too good to be true or a one time opportunity?

Is there scope for the dividend to be cut in the next couple of years?
Well management has committed to increasing it by at least inflation for the next two years. DigitalLook reports the 2017 dividend was covered 1.4 times and that 2018 will be covered 1.2 times. Morningstar shows decent cashflow and interest cover of 25 time (suspiciously high, but it has been around 5 times for the last three years).
All in all the dividend does not look at short term risk.

So why the current yield?
Presumably this is down to political risk, price caps and the threat of nationalisation at significantly less than market price by a future Labour government. If I understand correctly the price caps will only apply to the standard variable rate and will only last initially until 2020 with a potential to extend to 2023. The detail of the cap is still to be worked out and who knows how meaningful it will actually end up being. The much bigger threat is the Labour party statements on nationalisation. But with the next election not due to happen until 2021a lot can happen and there is no certainty that Labour will be elected or if utility nationalisation will be hivh kn the priority list if they are.

So in a year will the yield on offer from SSE still be 7% or like HSBC and Shell will the yield have dropped from the recent opportunity levels? Personally I am seriously thinking about buying more SSE.

Terry.

[Dod101]

I have held SSE for many years and am happy to continue doing so. However I think Wizard has highlighted the risks. If he is prepared to accept them then fill his boots! I think the dividend is unlikely to be cut unless the price cap or threat of nationalisation becomes more real.

So on balance an opportunity (but not too good to miss!)

Dod

[monabri]

Another consideration.
In the future, your individual share in SSE might ( might) become SSE + mergeco. So your 1300p investment might eventually be split between two companies. Who knows what the yield might be with mergeco and what the overall composite yield might be? Mergeco being the unloved parts of SSE and loss making part of nPower.

(Are we buying a share in mergeco which might turn out to be an inferior version of Centrica?)



I have SSE interest on debt covered at 6.6x.
Dividend cover at 1.5 reducing to 1.3 over the next 3 years forecast.

https://simplywall.st/stocks/gb/utiliti ... sse-shares

[Wizard]

Another consideration.
In the future, your individual share in SSE might ( might) become SSE + mergeco. So your 1300p investment might eventually be split between two companies. Who knows what the yield might be with mergeco and what the overall composite yield might be? Mergeco being the unloved parts of SSE and loss making part of nPower.

(Are we buying a share in mergeco which might turn out to be an inferior version of Centrica?)



I have SSE interest on debt covered at 6.6x.
Dividend cover at 1.5 reducing to 1.3 over the next 3 years forecast.

https://simplywall.st/stocks/gb/utiliti ... sse-shares

Thanks for the more reasonable sounding interest cover number.

In terms of mergeco I see that as positive overall. Based on the current plans SSE shareholders will get separate shares allowing them to decide if they want both or just one of the two parts of SSE, I also believe SSE are suggesting the merger coild result in up to £100m of synergies, which can't hurt. As ever we will only know the answer when the deal structure is known and the shares are trading / post split dividends flowing.

Terry.

[tjh290633]

You have it right in your last sentence, Wizard. When Six Continents split into IHG and MAB, IHG had a much lower yield but started rising in price and returning capital with share consolidations. The increasing price led to a falling yield, which made it unattractive for buying more shares, despite increasing dividends, and I exited because of the low yield. MAB had a better yield and so was brought up to full weight. It too started to rise and eventually I sold that as the yield fell below 2%, which was fortunate as they ran into hard times.

It is important to be able to decide whether to keep both of the new parts and also, whether to bring both up to weight. Yield and dividend policy matter and the merger documents should allow such decisions to be made.

TJH

[Dod101]

SSE have shown over the years that they know what they are doing and the cover you mention for the dividend is fine for a utility I think.

I do not think SSE would be selling their retail business and putting it into mergeco unless it was inferior and I do not expect that I will keep it but it is much too soon to be thinking of that until we see the detail.

I am not inclined to think that it is currently too good an opportunity to miss, very little is.

Dod

[jackdaww]

i've just topped up SSE in the hope they are cheap.

-- financed by the sale of my NEXT shares , thinking they are dire , and will be woodfords next debacle .

[moorfield]

So in a year will the yield on offer from SSE still be 7% or like HSBC and Shell will the yield have dropped from the recent opportunity levels? Personally I am seriously thinking about buying more SSE.

Hello Wizard, I'm planning a small top up in the new year to bring up to "maximum weight" in my portfolio (ie. contributing 10% of overall income). As others are I'm also happy to continue holding, despite the prospect of bits of the business being broken off. If that happens, I'll worry about it in 2019.

[vrdiver]

I bought a full holding of SSE in 2012, at £13.04 (including costs). I note that the dividend CAGR is 2.57% and 4.76% over 5 and 10 years respectively. My XIRR (assuming all dividends withdrawn immediately) is 6.6% which whilst not a disaster, is not a top performer either!

This may be a great time to get on board (I hope so) but the "too good to be true" dividend, possibly exacerbated by political interference fears, makes me nervous to top up what is now a partial holding. Its 5-year history in my hands has been mediocre at best and with both political parties keen to champion "hard-working families" against the "greedy energy companies", I suspect the best I can hope for is that the regulator will hold the utilities to pedestrian performance for some years to come. The worst is, of course, nationalisation or draconian caps on pricing and an implosion in valuation.

For me, this is a hold, but I'm looking elsewhere for top-ups.

VRD

[Dod101]

I am inclined to agree with vrdriver and his bout of realism although I have had a substantial holding in SSE for many years. If the spin off goes through that should remove the price cap problem; it will just leave the small problem of Corbyn's nationalisation if he ever gets power.

Haven't we seen folks getting sucked into a 'too good to miss' scenario before?

Dod

[idpickering]

I have held SSE for many years and am happy to continue doing so. However I think Wizard has highlighted the risks. If he is prepared to accept them then fill his boots! I think the dividend is unlikely to be cut unless the price cap or threat of nationalisation becomes more real.

So on balance an opportunity (but not too good to miss!)

Dod

I agree Dod. As I mentioned just now on the other board, my account is set to buy more Sse plc next month.

Ian.

[Gengulphus]

Presumably this is down to political risk, price caps and the threat of nationalisation at significantly less than market price by a future Labour government. If I understand correctly the price caps will only apply to the standard variable rate and will only last initially until 2020 with a potential to extend to 2023. The detail of the cap is still to be worked out and who knows how meaningful it will actually end up being. The much bigger threat is the Labour party statements on nationalisation. But with the next election not due to happen until 2021a lot can happen and there is no certainty that Labour will be elected or if utility nationalisation will be hivh kn the priority list if they are.

Indeed, but remember that there are two components to any risk: the chance of the bad thing happening, and the severity of the consequences if it does happen. In the case of the risk of a Labour government nationalising SSE (or any other utility, and there are some other obvious targets for them as well, e.g. the train operating companies), even if the chance of it happening is quite low, it could end up being anything up to a 100% loss. There would doubtless be legal battles about the right to property and not to be unreasonably deprived of it, but a determined government could overcome them by such measures as first imposing a high 'windfall tax' to make the companies less healthy financially, then nationalising them with little or no compensation, then arguing that that was all the compensation that was justified - with the backing of an 'independent' review set up by someone appointed to do it by the government...

Even a small chance of say 5% of a loss that big happening is quite a major risk in HYP terms, especially when it is accompanied by other, more likely though less severe risks.

I'm not saying that I think it's a bad idea to buy SSE and more generally utilities and other shares that might be at risk of nationalisation under a Labour government. Indeed, I think it's probably quite a good bet, on general "the market hates uncertainty" grounds - i.e. it tends to overreact negatively to cases where it is highly uncertain whether a momentous event is going to happen. (As an example, it has responded pretty positively to the "leave" outcome of the Brexit referendum last year, and I'm pretty certain it would have responded even more positively had the outcome instead been "remain" - i.e. it hated the uncertainty of not knowing what the outcome was going to be even more than it hated either outcome!)

But it is a bet, and one you could lose. That shouldn't be an argument against it for HYPers - every HYP purchase is a bet! - but it should be an argument for limiting the size of the bet. It's basically the same argument as the main one for diversification, namely that it's safer to make many small bets than a few big ones, because it makes the chance of losing all the bets (or significantly more than statistically expected) much lower. And note that the bets are on the risks actually happening rather than on the individual companies - in some cases, they're basically the same thing (e.g. the risk of an oil producer suffering a major oil spell is largely company-specific, so "BP won't suffer a major oil spill" and "Shell won't suffer a major oil spill" are more-or-less independent bets, with very different outcomes possible as demonstrated in 2010) and in other cases they're not (e.g. "there won't be a credit crunch" was a losing bet in 2008, and affected all banks and many other companies as well).

So what I am saying is: look at your HYP, add up the value of the holdings that would be at reasonably obvious risk of nationalisation under a future Labour government, and contemplate the possibility of losing that amount. It will almost certainly look pretty painful, and you basically need to be able to contemplate such a loss as a very-nasty-but-not-prohibitive possibility to be a HYPer. But if it's prohibitive or anywhere near prohibitive, don't top up any of those holdings or buy any others that are at reasonably obvious risk of such nationalisation.

Gengulphus

[vrdiver]

SSE are divesting their retail business and Shell are buying one. They cannot both be right. Myself, FWIW, I think it's a howler from Shell. But they are so huge now, it isn't going to make any difference to them really anyway.

You may be interested in this thread: viewtopic.php?f=15&t=9154&p=105912#p105912 which discusses your issue about whether one or other management teams might be wrong.

VRD

[GoSeigen]

Indeed, but remember that there are two components to any risk: the chance of the bad thing happening, and the severity of the consequences if it does happen. In the case of the risk of a Labour government nationalising SSE (or any other utility, and there are some other obvious targets for them as well, e.g. the train operating companies), even if the chance of it happening is quite low, it could end up being anything up to a 100% loss.


Gengulphus

There's also a strong possibility that the nationalisation could be done by a conservative government, and a strong possibility that a Labour government pays close to market price for the shares at nationalisation. For some history look at post-war nationalisations.

GS

[jackdaww]

i've just topped up SSE in the hope they are cheap.

-- financed by the sale of my NEXT shares , thinking they are dire , and will be woodfords next debacle .

===================================

unusually , my buy went up and the sell went down -- so a (very short term) win-win --- nice .

on top of that , the FTSE , and my portolio (no doubt amongst many others) finished at record highs.

roll on 2018 - may it be better for the many in the world who are having a very rough time .

[moorfield]

Worth noting too that SSE goes ex-dividend on 18 January, after which the benefit of any top up would not be felt until the September final dividend, by which time the spin off picture may be clearer.

[Dod101]

Indeed, but remember that there are two components to any risk: the chance of the bad thing happening, and the severity of the consequences if it does happen. In the case of the risk of a Labour government nationalising SSE (or any other utility, and there are some other obvious targets for them as well, e.g. the train operating companies), even if the chance of it happening is quite low, it could end up being anything up to a 100% loss.


Gengulphus

There's also a strong possibility that the nationalisation could be done by a conservative government, and a strong possibility that a Labour government pays close to market price for the shares at nationalisation. For some history look at post-war nationalisations.

GS

And of course it may never happen

Dod

[idpickering]

Worth noting too that SSE goes ex-dividend on 18 January, after which the benefit of any top up would not be felt until the September final dividend, by which time the spin off picture may be clearer.

My top up goes in on the 17th Jan, so that's ok. I was aware of the ex divi date to be honest. Probably my last top up of these as I'm 'full' of their shares in my HYP.

Ian.

[DiamondEcho]

Worth noting too that SSE goes ex-dividend on 18 January, after which the benefit of any top up would not be felt until the September final dividend, by which time the spin off picture may be clearer.

Depends how you consider it, my perspective is that post each X/D the newly accruing earnings and hence dividend is reflected over time in the share price. This again resets come the next X/D. A more black and white version happens in bonds, where you value the instrument incorporating precisely the accrued entitlement to the next coupon. Stocks are arguably a bit more 'saw-tooth' as cash is handed over, but IME the drop in value that equates to the div tends to be reduced vs the wider price profile, and is often made up quite fast.
So no, I don't agree with the proposition that the benefit of the divs on SSE wouldn't be felt for 9 months [?] due to how to the future div payment entitlements might fall due.

[moorfield]

Depends how you consider it, my perspective is that post each X/D the newly accruing earnings and hence dividend is reflected over time in the share price.

So no, I don't agree with the proposition that the benefit of the divs on SSE wouldn't be felt for 9 months [?] due to how to the future div payment entitlements might fall due.

Written from an HYP income perspective, meaning a share purchased after 18 January is then not going to receive any payout until late September. I'm told people in the Other Place don't care about dividends being reflected in their share prices