So, SSE (LSE: SSE) (NASDAQOTH: SSEZY.US) is going to freeze its domestic electricity and gas prices until 2016, and that’s a move that will affect profits — but I still think the company is a good investment for an ISA?
I do, yes, and judging by the share price movement on the day of the announcement (it gained 30p to 1,528p in early trading), I’m not alone.
The most important thing is the long term — ISAs provide the best rewards if you can stash some shares away in them for 20 years or more, so looking for companies with longevity is what counts. And with our allowance going up to £15,000 in July, if you can use a decent proportion of that each year over the next couple of decades, you’ll be doing very well indeed.
Profits can be maintained
In the short term, SSE’s price freeze actually doesn’t matter much anyway, as the company is planning to “streamline” itself to cover the shortfall in profits — it plans to cut 500 jobs and is putting three wind farm projects into mothballs.
Whether there’s a political message there, well, I’ll leave you to decide. But for me, over the course of a long-term investment, politics doesn’t matter much — the energy companies will still be around and generating handsome profits long after today’s headline politicians are history.
And what is it that makes SSE a good long-term investment? It’s really the strength and reliability of its dividends.
Reliability
Like the rest of the sector, the company’s future revenues and costs are more predictable and stable than most, and a big chunk of annual earnings can be handed over as cash — SSE’s dividends are yielding around the 6% level at the moment, and are amongst the best in the market.
In fact, even if the share price remained static over the next 20 years and the dividend didn’t budge, if you reinvested your 6% yield in more shares you could turn an initial £1,000 investment into £3,200 — more than twice the £1,300 you’d get from a typical cash ISA.
Here’s what it could really be worth!
But the chances of the dividend and share price not moving are slim — and if we guess at even a modest 3% per year rise in the shares with the dividend yield being maintained, that £1,000 could be worth around £5,600!