A Closer Look at SSE's Dividend Potential

LONDON -- Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of SSE  (LSE: SSE  ) and assessing whether the company is an appetizing pick for income investors.

How does SSE's dividend history stack up?

  2009 2010 2011 2012
FY Dividend Per Share 66p 70p 75p 80.1p
DPS Growth 9.1% 6.1% 7.1% 6.8%
Dividend Cover 1.6x 1.6x 1.5x 1.4x

Source: SSE Company Accounts

Providing chunky shareholder payouts is ingrained in power play SSE's DNA. The company has been a dependable deliverer of dividend growth dating back to 1999, and has punched mid-to-high-digit-percentage growth over the past five years. The company's commitment to maximizing shareholder returns is illustrated by last year's dividend, the growth of which outstripped a 0.4% earnings per share (EPS) increase.

SSE has a history of providing dividend cover below the established safety mark of two times forward earnings. However, electricity's role as a must-have commodity marks the company out as a classic defensive play and thus provides excellent earnings reassurance.

What are SSE's dividends expected to do?

  2013 2014 2015
FY Dividend Per Share 84.4p 88.2p 91.9p
DPS Growth 5.4% 4.5% 4.2%
Dividend Cover 1.3x 1.3x 1.4x
Dividend Yield 5.4% 5.6% 5.8%

Source: Digital Look

The company has once again attracted bad press in recent weeks after Ofgem imposed a £10.5 million fine related to mis-selling practices, the largest financial penalty imposed by the regulator. SSE is also being investigated over their failure to meet energy efficiency targets.

However, this has not dented share price momentum as investors expect steady earnings growth to underpin solid dividends. The company said that it expects all three of its divisions -- Networks, Retail and Wholesale -- to have been profitable in the year ending March 2013, results for which are due on Wednesday 22 May. SSE has a solid track record in churning out steady earnings growth, which I expect to remain in spite of potential reforms to the electricity market in the near future.

City brokers expect EPS for 2013 to rise 1% from the previous 12-month period. Earnings are then expected to pick up traction, rising 3% and 11% in 2014 and 2015 respectively, which should in turn significantly bolster dividend potential.

Indeed, payouts are expected that of to keep on rolling higher over the medium term, even if growth is anticipated to moderate from previous years. SSE plans provide an "increase of at least 2% more than inflation" for 2013, and aims to keep dividends north of the retail price index (RPI) well into the future.

How does SSE's dividend prospects rate against the competition?

  Prospective Dividend Yield Prospective P/E Ratio
Electricity 3.2% 25.4
FTSE 100 3.2% 15.7

Source: Digital Look

SSE currently trades on a P/E rating of 13.5 for 2014, far below the price of both its peers in the electricity sector and the wider average for Britain's 100 biggest-quoted companies. As well, the company is also a more attractive income pick when viewed against the wider gas, water and multi-utilities sector, which boasts a dividend yield of 4.5% and a prospective earnings multiple of 28.3.

In my opinion, SSE represents a highly attractive pick for investors seeking reliable and increasingly lucrative investment income, underpinned by a continuation in solid earnings growth. Although chief executive Ian Marchant is set to stand aside in the summer, to be replaced by current deputy Alistair Phillips-Davies, I see no reason to suspect a sea change in SSE's generous dividend culture, and fully expect shareholder payments to keep on rolling.

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