The utilities sector has long been a happy hunting ground for investors seeking abundant income flows.
The country’s so-called ‘Big Six’ operators have had a strangehold on the electricity sector in years gone by, providing them with the sort of earnings visibility that most other FTSE 100 stocks can only dream of.
But the gradual emergence of smaller, cheaper independent suppliers is putting the profits outlook for the industry’s established players under significant pressure, a point underlined by the latest trading update from SSE (LSE: SSE).
The London firm advised this week that pre-tax profit dived 13.3% during April-September, to £475.8m, as its customer base continued to erode. SSE saw another 70,000 clients drop off its books during the period, taking the total number to 8.14m accounts.
While this may have been the lowest rate of droppage since 2013, latest data suggests that SSE can expect revenues to keep on struggling. Energy UK also announced this week that 577,810 energy customers switched accounts in October as tariff rises kicked in, the highest monthly total for three years.
Despite these pressures however, the City expects SSE to keep delivering bumper dividends during the medium term at least. Indeed, payments are forecast at 90.3p and 92.2p per share for the years to March 2017 and 2018, figures that yield 6% and 6.2%.
But I believe long-term investors may see yields fall in the coming years as revenues come under pressure and SSE ploughs vast sums into its infrastructure — it has earmarked £6bn in capital and investment expenditure up until the close of fiscal 2020. So I reckon those seeking market-mashing yields long into the future should shop elsewhere.
Travel trouble
Like SSE, the City believes that holiday giant TUI Travel (LSE: TUI) should keep on shelling out massive dividends, in the near term at least.
For the year ending September 2016 the leisure operator is expected to award a full-year dividend of 53.2p per share. And despite the muggy outlook for the travel segment, TUI is predicted to lift the reward to 53.8p in the current period, a projection that creates a huge 5.2% yield.
The sand-and-sea specialist went some way to soothing investor concerns over the impact of Brexit in September when it advised that its summer season was 97% sold, while bookings for the winter period were in line with expectations.
But this isn’t to say that demand for TUI Travel’s package holidays could suffer in 2017 and beyond as rising prices looks likely to batter consumers’ spending power. Big ticket items like holidays are often the first thing to fall by the wayside in times of economic trouble, after all. And the Bank of England expects inflation to race to 2.7% next year, up from around 1% at present.
Meanwhile, the persistent threat of terrorism also casts a shadow over demand for key locations like Turkey. I reckon there’s plenty of reason for investors to be fearful over TUI Travel’s earnings, and consequently dividend, outlook.