3 Ways SSE Plc Will Continue To Lag Its Sector

Right now I’m comparing some of the most popular companies in the FTSE 100 with their sector peers in an attempt to establish which one is the more attractive investment.

Today I’m looking at SSE (LON:SSE) (NASDAQOTH: SSEZY.US).

Valuation

Now, technically SSE sits in the FTSE 100 electricity sector. However, SSE’s only peer in this sector is power plant owner, Drax. So, for the purpose of this article I will be comparing SSE to its closest peers in the multiutilities sector, Centrica and National Grid.

Let’s start with a quick look at SSE’s valuation. Currently, SSE trades at a historic P/E of 11.9, which makes the company look cheap compared to the multiutilities sector average P/E of just under 14. What’s more, SSE also looks cheap when compared to peers Centrica and National Grid. Indeed, Centrica and National Grid trade at a historic P/E of 13.4 and 13.8 respectively. 

Company’s performance

However, it would appear that SSE deserves this low valuation. In particular, the company’s growth during the past five years has been less than impressive. In addition, City analysts predict that the company’s earnings will not expand at all this year.

That said, peer National Grid has only managed to grow earnings per share around 10% during the last five years, a rate of growth similar to that of SSE. Still, Centrica has managed to grow earnings 25% during the past five years and City analysts expect further growth of 3% this year. 

Dividends

Having said all of that, at present SSE’s dividend yield is one of the best you can get. Indeed, SSE’s dividend yield currently stands at 6%, which is 1.1% above the multiutilities sector average of 4.9%.

In addition, SSE has increased its payout by around 28% during the last five years and City analysts predict further payout growth of 5% this year.

Unfortunately, the dividend yields of National Grid and Centrica do not look as appealing. Indeed, National Grid currently yields 5.3% and Centrica currently offers a 4.5% dividend yield. Still, Centrica’s lower yield looks safer than that of SSE, as Centrica is able to cover its payout 1.6 times by earnings. Meanwhile, City analysts expect that SSE’s 2014 dividend payout will only be covered 1.3 times by earnings. 

Foolish summary

So all in all, SSE does look cheap in comparison to its peers and the wider sector. Additionally, the company also supports an impressive dividend yield. That said, SSE’s earnings growth has been unimpressive during the last five years and City analysts expect this lacklustre performance to continue. 

So overall, I feel that SSE is a much weaker share than its peers.