SSE (LSE: SSE) shares are among the most popular on the entire FTSE 100 for investors seeking income. Lately, they’ve also been delivering capital growth.
The power generator is on a bit of a roll, with its shares jumping 30% in the last six months. That is impressive for a supposedly stodgy utility. That said, measured over one, year the share price is up just 1.5%.
Investor confidence has been boosted by January’s annual earnings expectations upgrade from 120p per share to 150p. Higher gas prices and better storage offset are more than compensating for the group’s lower-than-expected renewables output.
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Subject to weather
Electricity production had fallen 10%, as unseasonably calm and dry weather hit both wind and hydro production. The group has also suffered delays to its 150-turbine Seagreen offshore wind farm in the North Sea. It should be completed this summer.
SSE still has a fleet of gas-fired plants, which helped keep the energy flowing during the colder winter months.
One downside of holding its shares is that the company has to invest heavily in future energy generation as it makes the shift to net zero, pumping in more than £2.5bn in the year ahead. While it plans to pay a full-year dividend of 85.7p per share plus RPI this year, next year’s shareholder payouts will be cut to fund this capital expenditure.
Currently, SSE is forecast to yield 5.2% for 2023, covered 1.5 times by earnings. If I was to tip my entire £20,000 Stocks and Shares ISA limit into this one stock, I would generate income of £1,040 a year, or £87 a month.
But as mentioned, there’s that catch. The board plans to rebase the 2022/23 payout to 60p in 2023/24, to support its “significant” capital expenditure. As a result, SSE shares are expected to yield 3.3% and 3.5% for the next two years. That would reduce my income to £660 and £700 a year respectively.
The good news is that management then plans to increase the dividend by at least 5% both in 2025 and 2026. Rebasing will also help grow the business and deliver future dividend growth, albeit at the cost of my short-term income stream.
I’d invest a smaller sum
Investing in SSE brings risks, such as gas price volatility, plant availability and weather conditions. Yet I’m glad to see it facing up to the net zero challenge. While it adds to the short-term costs and risks, it should pay off in the long run. So would I buy it today?
SSE shares currently trade at 19.3 times earnings. This is relatively cheap for the stock (which often trades closer to 25 times earnings), but is relatively expensive for the FTSE 100 at the moment.
While I’m disappointed about the dividend cut, as a long-term buy-and-hold investor, I have plenty of time to watch it recover. The danger is that it could be rebased again, next time management wants to invest in new plant.
Given all the great yields out there today, I wouldn’t tip my entire £20,000 ISA allowance into SSE. I’ll keep an active watch on its share price over the next few months, and if it dips at some point, I might invest, say, £3,000.
