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SSE dividend security looks weaker

Warm weather and high commodity prices have led to a one-two punch of lower consumption and generation
September 12, 2018

Energy giant SSE (SSE) saw its shares drop 8 per cent on the day management warned adjusted operating profits for the five months to the end of August would be around £190m lower than previously expected. A combination of high gas prices and weather that has been warmer, drier and calmer than usual has impacted the group’s energy portfolio management business, leading to reduced consumption and lower output from renewable generation (the group runs a portfolio of wind farms and hydroelectric plants). As a result, management expects adjusted operating profits for the first half to be half that of the same time last year. 

IC TIP: Hold at 1151p

The wholesale energy portfolio management division is set to be the worst performer, with management guiding towards a £100m adjusted operating loss for the first half and over £300m for the year to March 2019. Meanwhile, guidance for the retail business was not much better, with management expecting it to break even. Brokerage RBC Capital Markets thinks the full-year impact on group adjusted operating profits would be around £350m. 

Investors have had concerns about the domestic energy supply market for some time now, as political pressure has mounted to keep bills low. But SSE was considered less at risk than rival Centrica (CNA) due to its plans to de-merge its household supply business into a new company with Npower. However, it is the wholesale and energy portfolio management businesses that are expected to bear the brunt of these fresh challenges. 

Given SSE’s popularity as an income play, investors will be anxious about any potential threat to the dividend. Management said the group still expects to pay a full-year dividend of 97.5p – in line with expectations – and to deliver the new five-year dividend plan laid out at the last full-year results in May. The group is planning an 80p-a-share post-transaction dividend in 2019-20, following completion of the demerger, and an increase in the full-year dividend at least in line with the retail prices index (RPI) annually until March 2023.