How low can the SSE share price go?

Businessman looking at a red arrow crashing through the floor

Over the two decades to 2007, energy utility SSE (LSE: SSE) earned a reputation for superb profit and dividend growth and, a more or less, a consistently rising share price. Today, we’re looking at a situation where the share price has fallen from a post-financial-crisis high of 1,650p in 2014, and a 52-week high of 1,450p just a few months ago, to a recent multi-year low of below 1,100p. Has the market done with savaging the shares, or could they fall even further?

Losing it

The consensus among City analysts is that SSE will deliver earnings per share (EPS) of 89p for its financial year to 31 March 2019, giving a price-to-earnings (P/E) ratio of 12.9 at a current share price of 1,150p. The company recently reiterated the board’s previous guidance that it expects to recommend a dividend of 97.5p for the year, which gives a terrific-looking yield of 8.5%.

However, we should note that the dividend will be uncovered by earnings, and also that it will be rebased to 80p for fiscal 2020, bringing the yield down to 7%. This still represents a superb income. Furthermore, with EPS for the year forecast to rise to 105.3p, the dividend would be well covered and the P/E would drop to 10.9. Such fundamentals would appear to underpin the current share price and, indeed, give it plenty of scope to rise.

Having said that, I’ve become increasingly concerned in recent months by growing competition from smaller rivals, increasing regulatory pressure, the Labour Party’s nationalisation plans (should it get into power), and the additional uncertainty of SSE’s planned merger of its retail business with that of Npower. While I haven’t viewed these as necessarily fatal to the investment case, one of the key factors for SSE’s recent shock profit warning has been the final nail in the coffin to persuade me to view the stock as one to sell.

The exceptional summer I consider a one-off, but the big losing bet made on lower gas prices by the group’s energy trading arm, which came out of the blue, is much more of a concern for the future. It has led me to conclude that SSE no longer possesses the visibility and predictability of earnings and dividends that I demand from an investment in the utilities sector.

Alternative energy

Smaller energy utility Jersey Electricity (LSE: JEL), which is the monopoly supplier of electricity to the island of Jersey, is much closer to my idea of a utility investment with the requisite characteristics. The States of Jersey — the government of the British Crown dependency — owns 62% of the company, while the remainder of the shares have traded on the London stock market since 1964.

The company has consistently balanced ongoing investment in infrastructure with affordable electricity for customers, plus attractive, steady returns for shareholders. The dividend has increased at a compound annual growth rate of around 5% over the last five years. I’m confident this rate of growth can be maintained because, after a phase of heavy infrastructure investment, the dividend is underpinned by steadily increasing profits and reduced capex.

At a share price of 473p, forecasts for Jersey Electricity’s current financial year put it on a P/E of 13.6, with a prospective dividend yield of 3.2%. I view this, as an attractive offering for such a reliable business, and I rate the stock a ‘buy’.

Buy-And-Hold Investing

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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