While the performance of SSE (LSE: SSE) has been very mixed over recent months, the FTSE 100 utility company could now offer an improving outlook. Its shares appear to offer a wide margin of safety, while its income return could boost its total return over the coming years.
This could mean that its risk/reward ratio is more appealing than investing through a cash ISA, where the potential returns available are around 1.5%. Alongside another FTSE 100 stock which released an update on Wednesday, the company could be worth buying for the long term.
Improving prospects
The other company in question is wealth manager St. James’s Place (LSE: STJ). Its annual results showed it has performed well at a time when the wider financial services sector has experienced an uncertain period.
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For example, it reported a rise in gross inflows, increasing to £15.7bn from £14.6bn in the previous year. Its funds under management also increased to £95.6bn from £90.7bn a year ago. Meanwhile, underlying operating profit increased 9% to £1,002m, with underlying cash earnings per share rising by 10% to 58.7p.
Looking ahead, the stock is forecast to post a rise in earnings of 20% in the 2019 financial year. Despite this, it has a price-to-earnings growth (PEG) ratio of just 1.2, which suggests it may offer a wide margin of safety.
One reason for its low valuation is its share price decline of 16% in the last year. Although further falls in the stock price cannot be ruled out, St. James’s Place appears to have a sound strategy and could deliver a successful recovery over the medium term.
Changing business
While utility companies are usually desired for their relative stability, SSE is undergoing a period of intense change. The process of disposing of its domestic energy supply division has been somewhat long-winded, with plans to merge it with npower falling through. It’s now assessing its options, and is likely to make a decision on how to dispose what could be a challenging business over the medium term. For example, political risks are high, while price caps could signal lower levels of profitability are ahead for the sector.
As such, the company’s renewables division could become an increasingly desirable place to invest. SSE has a strong foothold in the green energy industry, and this could help to catalyse its financial and stock price performance in the long run.
In the meantime, the company has a dividend yield of around 7.1%. It also plans to raise dividends by at least as much as inflation over the next few years, which could become increasingly appealing to investors should the UK economy experience a challenging period. As such, after a disappointing year which has seen its share price come under pressure at times, now could be the right time to buy.
