Today I am looking at why I believe shares in SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) are set to recover once the current political furore overshadowing the British utilities sector subsides.
Pay little heed to recent Westminster rumbles
SSE has been a consistent headline-maker in recent weeks, as the sensitive subject of rising utility costs have again loomed large on the horizon. Firstly, Labour leader Ed Miliband went for the jugular in September when he announced at his party’s annual conference that he would freeze gas and electricity bills for 20 months if elected to power in 2015.
With this political rhetoric ringing in their ears, SSE announced last week plans to raise the average household bill by 8.2% from mid-November. The company cited a rise in global energy prices, network costs and government-imposed levies as critical factors behind the move as margins have been squeezed.
The decision not surprisingly prompted widespread condemnation from both sides of the House, consumer groups and customers, a factor which has led to speculation of more political sparring in the months and years ahead.
“Clearly the UK’s place as the safe haven of the utility sector is under threat if it hasn’t already gone,” broker Liberum Capital noted. “The consensus trade ever since 2010 has been long UK / short Europe. Given the sharp rise in UK political risk, that trade could now be unwinding.”
Although investors must of course be aware of rising pressure on utilities firms to rein in price hikes, in reality vote-winning rhetoric on the issue from Westminster is not a new phenomenon. Despite these fresh waves of political grandstanding, MPs realise that, in reality, utilities companies must generate enough cash to invest in the power grid to keep the lights on. In order to do this, they must also maintain their attractiveness to share investors by distributing meaty dividends.
I bought shares in the company earlier in the year owing to its sterling record of raising annual dividends dating back as far as the last century. As the company proclaims on its website: “[W]e have just one strategic priority: sustained real dividend growth.” And SSE has said that shareholder payouts should continue to outstrip retail price inflation well into the future.
Indeed, City analysts expect the electricity giant to raise last year’s 84.2p full dividend to 88p in the year ending March 2014, a 4.5% annual increase. This is then expected to rise an additional 4.6% in the following 12-month period, to 92p.
These dividends currently carry eye-watering dividend yields of 6% and 6.3% for 2014 and 2015 respectively. Shares have rattled more than 8% lower since Mr Miliband’s speech in September, which I consider to be a fresh buying opportunity.