SSE's income is more secure

Through its five energy network companies, SSE is the only UK energy company to be involved in electricity transmission, electricity distribution and gas distribution. These provide a reliable income due to the regulated nature of the market, and means its returns are more utility-like than Centrica (CNA), with its major British Gas business.  As of the most recent results, SSE's networks had a regulatory asset value of £7.68bn, down 4 per cent in the year following the partial sale of Scotia Gas Networks last year but offset by development elsewhere. The group is investing heavily in improving and expanding its networks, and expects that asset value to reach around £9bn by 2020.

The company’s policy is to increase its dividend annually in line with the retail price index. But the share price has underperformed rivals in the past year, and now sits close to its 12-month low, which has inflated the dividend yield into dangerous-looking territory.

However, despite historic fears over the dividend coverage, with analysts at JP Morgan warning in 2014 that the group’s coverage was “unsustainable”, it has remained within its 1.2 to 1.4 times adjusted earnings target range since then and is on track to stay on course in 2018, although towards the lower end of the range. Analysts at RBC Capital Markets predict that continued expansion of the renewables portfolio, combined with progress in the networks division, will mean a return to growth in coming years, with dividend cover moving up the range (see table for the forecasts).

Clearly 2017 has been difficult for the big energy companies, as the general election tempted both major parties to propose price caps for energy customers on the standard variable tariff (SVT). That threatened a major hit to the bottom line of the big six, for whom the SVT makes up a sizeable chunk of their retail customer base. Again, this would proportionally be a bigger threat to earnings for Centrica.

Election over, that threat has receded somewhat. The policy was conspicuously absent from the Queen’s Speech and Ofgem instead is taking steps aimed at facilitating competition as well as considering options for a “safeguard tariff”, which would prevent fuel-poor customers from overpaying for energy. The threat of a more substantial price cap has not entirely disappeared, with more than 90 MPs signing a letter encouraging the Prime Minister to introduce “an energy price cap that protects all of the 17m families currently on expensive SVT deals, not just the 2m vulnerable ones”. This regulatory risk isn't going away.

Other efforts to increase the level of competition in the market have already chipped away at customer numbers for SSE. The number of energy suppliers has increased sharply from 11 in 2007 to 52 at the end of 2016, and customer numbers slipped 2.6 per cent in 2016 to 8m. In order to combat the decline, the group is working to increase its industrial and commercial customer base and build the presence of its home services business.

With increasing policy and consumer demands for cleaner, more efficient energy, SSE has moved heavily into renewables. The group has invested more than £3.2bn since 2010 and now has the largest renewable energy capacity in the UK and Ireland with 3.3GW, made up of hydroelectric, onshore and offshore wind and biomass. This is 31 per cent of the group’s total 10.6GW electricity generation capacity. In August this year, SSE launched its inaugural green bond, raising €600m (£529m) and maturing in 2025.