Don’t you just love it when those gas and electricity bills hit the freezing doormat after a long and bitterly cold winter? No? Me neither. It’s the same all around the country. Those post-winter, post-Christmas energy bills are probably the worst to deal with. But not for the energy companies themselves, because that’s when they make their money. It’s their peak season, if you will.
So how can we profit from this phenomenon? We can become shareholders of course. But with six huge companies to choose from, which one(s) should we invest in?
Government crack-down
Well, you’ll be surprised to learn that only two of the UK’s ‘Big Six’ energy suppliers are listed on the London Stock Exchange, the rest have been taken over, with some now under foreign ownership. That leaves just SSE (LSE: SSE), which was formerly Scottish and Southern Energy, and Centrica (LSE:CNA), the owner of British Gas and the UK’s largest domestic supplier of gas and electricity.
The share prices of both these FTSE 100 stalwarts have come under pressure lately as Theresa May’s government promises to crack down on the Big Six, with the potential for industry regulator Ofgem capping the default standard variable tariffs until 2023. Needless to say, this will have a big impact on the profits of our two remaining listed energy giants.
But this threat has been lingering for some time, and the market has already responded by wiping billions of pounds off the value of SSE and Centrica’s shares, leaving them trading at multi-year lows, and further inflating the yields on their generous dividends.
Inflation-beating returns
In recent years SSE has performed the better of the two, suffering to a lesser extent from the effects of customers switching to alternative suppliers. As a major utility play, the energy giant has always been seen as a relatively safe place to park savings and earn inflation-beating income.
The Perth-based group has continued to reward shareholders with handsome payouts, with management working towards achieving dividend cover within a range of around 1.2 to 1.4 times earnings going forward. To me the dividend looks pretty safe.
SSE’s shares have suffered from recent concerns over plans to cap energy prices, leading to a share price slump to near three-year lows, while at the same time swelling the prospective dividend yield to 7%. Despite the recent noises from Ofgem and the government, I still see the utility giant as a safe place to stash your cash and generate steady and reliable income.
Monster yield
Meanwhile, in a trading update last month, rival Centrica warned that full-year earnings for 2017 would be below market expectations, reflecting lower-than-expected operating profit in its business divisions both in the UK and North America.
Management attempted to reassure investors concerned about the sustainability of its dividend, pointing out that the current year shareholder payouts were underpinned by net debt which was within its target £2.5bn-£3bn range, along with £2bn of operating cash flow. Unfortunately, that didn’t stop the shares plunging to 18-year lows.
Yet at current levels, Centrica’s prospective yield equates to a massive 8.3%, according to consensus forecasts, and even if management was forced to trim the dividends in the future, we’d probably still be left with a yield that beats most of its blue-chip peers.