SSE to keep dividend hike in line with inflation despite challenges

In an update on third quarter trading, energy company SSE confirmed it still expected to return to full year growth and increase its dividend by at least the same rate as inflation this year and in the future.

For the nine months to 31 December, energy consumption was higher due to the weather but the third quarter saw volatile wholesale energy market conditions and relatively dry and still weather during November and December that led to low output of renewable energy.

"Despite these issues, and several persistent uncertainties in aspects of the operating environment, SSE is well placed," said chief executive Alistair Phillips-Davies.

"Our fundamental strengths and opportunities for growth mean SSE is on target to meet its first financial objective of an increase in the full-year dividend, at least in line with RPI inflation."

SSE, which in November announce it would freeze standard household energy prices this winter until at least April 2017, also confirmed it remains on target to achieve a full year return to growth and deliver adjusted earnings per share* of at least 120p.

Capital expenditure was expected to be around £6bn over the period 2016-20, with SSE having already committed to spending close to £5bn of this to economically-regulated electricity networks and government-mandated renewable energy projects.

For the current financial year, the FTSE 100 company now expects that its capital and investment expenditure will total around £1.75bn gross, which would be the highest annual investment and capital expenditure by the company to date.

Shares in SSE drifted slightly lower to 1,480p after almost three hours of trading on Tuesday.

SSE is one of the 10 highest yielding stocks in the FTSE 100 and income seeking investors were likely to further warm to the company as a result of the confirmation of the full year dividend, said Russ Mold, investment director at broker AJ Bell.

He noted that SSE's forecast dividend cover of 1.33 is slightly better than the 1.28 average for peers on the blue chip yield leaderboard, "even if its (admittedly tightly regulated) earnings are more predictable than the profits offered by the other high-yielding names".

Analyst Nicholas Hyett at Hargreaves Lansdown said while SSE's prospective yield of over 6% represented a pretty generous payment he pointed out that that the heady height of the yield was a reflection of the fact that cash generation has been a problem for the group in recent years.

"Capex has surged, hitting a record high this year, but cash generation has remained stubbornly flat, with returns to shareholders fuelled by disposals rather than organic performance. That’s not sustainable in the long term, meaning the group will have to either slash costs or reduce capital expenditure," he said.

"There could be pain ahead for retail customers as well. Price pressures are mounting, both as a result of higher energy prices and government policies, and SSE has only promised to cap prices until April 2017. The group is targeting cost savings, but we still wouldn’t be surprised to see prices rise.”