Scottish and Southern Energy - A Wolf in Sheep's Clothing?

Wednesday, Nov 09 2011 by
5
Scottish and Southern Energy  A Wolf in Sheeps Clothing

Utilities are often seen as boring investments.  They’re never going to be sexy, they’re never going to cure cancer or have their products at the top of a teenager’s Christmas wish list.  That may well be true, but value investors have a history of liking boring companies and Scottish & Southern Energy (LON:SSE) has a lot to like.

Value investors prefer boring

A boring company is often a good thing (although of course, boring is a subjective term).  It means that even if solid results are produced year after year, the share price won’t go crazy.  Since nobody thinks a utility company can produce stellar future growth, they tend to be reasonably valued. That’s because the only reason to pay a high price for a company is if you think that future earnings are going to be much higher than they are today. With many companies that may be a plausible – although usually incorrect – assumption.  Perhaps earnings have grown by 20% a year for the last three years; or perhaps a new product comes out that takes the world by storm and is a ‘game changer’. There are all manner of reasons why investors may get excited about a company, but it usually relies on some sort of happy story about the future.  With utility companies though, happy stories just don’t happen. In fact, very little of interest ever happens.  There are rarely big earnings surprises to the upside or the downside.  The product is always in demand and recessions are almost irrelevant.   The years tick by, the dividend grows somewhat and that’s about it.But don’t be fooled.  The lack of an exciting future can mask a great past.  Although the returns in any one year may not get headlines, over the long term they can really start to add up.

A clear plan

SSE has a simple purpose – to provide reliable energy to customers and above inflation dividend growth to shareholders.  In their annual reports there is a constant focus on above inflation dividend growth.   In fact, this goal is so integral to the operation of the company that they do a great job of explaining why a dividend target is important:


“Receiving and reinvesting dividends is the biggest source of an investor’s return over the long term;


Dividends provide income for those investors who…

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Disclaimer:  

This article is for information and discussion purposes only and nothing in it should be construed as a recommendation to invest or otherwise. The value of an investment may fall and an investor may lose all their money. Any investments referred to in this article may not be suitable for all investors.  Investors should always seek advice from a qualified investment adviser.


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SSE plc is a United Kingdom-based company engaged in the generation, transmission, distribution and supply of electricity; in the production, storage, distribution and supply of gas, and in other energy-related services. The Company's segments include Networks, which consists of electricity distribution, electricity transmission and gas distribution; Retail, which consists of energy supply, enterprise and energy-related services, and Wholesale, which consists of energy portfolio management and electricity generation, gas storage and gas production. The Company supplies electricity and gas to household and business accounts under its brands SSE, Scottish Hydro, Southern Electric, SWALEC and Atlantic in the Great Britain market, and SSE Airtricity in the markets in Northern Ireland and the Republic of Ireland. more »

Share Price (Full)
1346p
Change
1.9%
Mkt Cap (£m)
13,543
P/E (fwd)
11.8
Yield (fwd)
6.7



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10 Comments on this Article show/hide all

UK Value Investor 9th Nov '11 1 of 10

I thought I'd get this in before anyone else does. I wrote "There are rarely big earnings surprises to the upside or the downside"... apart from the 25% profit drop announced today! But of course they are still on for the year so that's okay.

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Steven Dotsch 9th Nov '11 2 of 10

Whilst a good write up with regards to the merits of SSE as a dividend stock, unfortunately based on our valuation methodology SSE is not currently near enough to being historically undervalued at these levels to warrent a purchase on behalf of our Dividend Income Portfolio.

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Fangorn 9th Nov '11 3 of 10

Agree.SSE has been on my watchlist for a while, but I'd certainly not buy it as current levels.(Hoping for a market panic induced 10 or 11 handle personally.)

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Isaac 9th Nov '11 4 of 10

I too am waiting for £10-11 on SSE - Would definetly like to buy some of these, they increase dividends at RPI + 2 %

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UK Value Investor 9th Nov '11 5 of 10

It looks like I'm paying a higher price than most people want to! That's quite unusual for me. However, I'd say that the yield is very close to 6% and historically it hasn't often been much higher than that. Only in the 2009 'end of the world' panic I think. But of course I would tip my hat in your general direction if you can buy at £10 and if it got there I'd probably top up with some more myself.

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Isaac 9th Nov '11 6 of 10

Well the way I see it there is hardly a lack of Investments out there which pay decent dividends, so it is not necessary to settle for very close to 6% when I can get higher.

I'd rather hold onto my cash until the opportunity comes to get a higher yield which could happen after it goes Ex-div next month as it seems to fall after ex-div & I mean falls more then just the dividend.

Right now I'd rather buy VOD then SSE, VOD pays a much higher dividend, 7.7% for next year? And in terms of risk I would probably say there's not much apart from the two.

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Fangorn 10th Nov '11 7 of 10

Comments from Goldman....

http://www.proactiveinvestors.co.uk/companies/news/35450/goldman-sachs-cuts-scottish-southern-energys-target-price-after-disappointing-results-35450.html?

Hardly a ringing endorsement. Definitely holding fire until 10-11 handle....which looks likely when Italy implodes, soon coming to a cinema near you!

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ravinder 13th Nov '11 8 of 10

I definitely need to get one of the utilities on my books.

i bought shares in some Indian energy companies -but not doing well at all.

IEL ! also have REH!

I am not an experienced investor - its more like gambling .I need to get smarter and think about dividends am looking at top 250 companies .

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fuiseog 13th Nov '11 9 of 10

Consider International Power (IPR.L). Low dividends but good growth prospects in a wide range of markets. It's been one of my 'tuck away and forget' holdings.

But DYOR of course.

fuiseog

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Fangorn 14th Nov '11 10 of 10

Ravinder,

In terms of Utility exposure I currently have the following:

UU
NG
CNA
BT


But am also looking at Drax, SSE and SVT.

If you are more globally orientated, as seems to be the case with your Indian investments, there are plenty of Utilities to look at overseas as well.

eg AT&T, The European Telcos seem to be offering chunky dividends as well(France Telecom, Telefonica)

Not sure if there is a specific "Utilities Fund" being managed out there (I suspect there must be) so that might be an avenue to explore.

Plenty to think about though.

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About UK Value Investor

UK Value Investor

My name is John Kingham and I'm the editor of UK Value Investor, an investment newsletter for defensive and income-focused value investors. That means I write about buying large, successful companies with long track records of profitable dividend growth, and buying their shares at low valuations and with high yields. My website includes a unique stock screen and a model portfolio which is managed using a checklist-based investment strategy.  The goal of the strategy is to produce a portfolio which combines a high yield and good capital growth with low risk, and which is easy to maintain in just a few hours each month. more »

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