There are plenty of great stocks to choose from, and I'm enjoying doing some window shopping. So here's the question I'm asking right now. Should I buy SSE (LSE: SSE.L ) ?
Something to chew on
Utility companies are strange beasts. Most investors see them as dull, safe, plodding ruminants, redeemed only by their tasty yield. Like cattle, or sheep.
You don't hunt utility stocks, in the way you hunt for a tigerish growth stock. You just round them up, corral them in your portfolio, and digest the dividends.
Yet utilities can sometimes bite. Energy production, storage, distribution, and supply company SSE, formerly Scottish & Southern Energy, saw its share price rise 20% to £14.30 in the first six months of this year, before crashing down to £12.92, a drop of nearly 10%, after Ofgem warned it wanted energy firms to spend £22 billion on upgrades. That's not exactly the dotcom crash part two, but hey, we are talking utilities here.
Life's a gas
SSE quickly recovered, following its interim statement later that month showing a solid second quarter. Electricity consumption per customer rose 6%, while gas consumption rose 42% on cooler weather.
SSE also added another 110,000 customers, and boosted both its onshore and offshore wind farm capacity.
Best of all, as far as investors are concerned, is that SSE stated that its poor financial objective is to deliver annual, above-inflation, dividend increases, and is on course to deliver a full-year hike of at least 2% more than RPI for 2012/2013, with more to follow from 2013/2014 onwards.
Frankly, that's what we want to hear.
As U.K. households have discovered to their cost, U.K. utility companies have pricing power. In August, SSE announced it will raise its gas and electricity by 9%, from October 9.
Yes, cash-strapped customers can shop around, using a price-comparison site. Or turn down their heating. And maybe one day politicians will act to keep a lid on prices. But in the end, most will pay the bill.
Supermarkets dream of such pricing power.
SSE me, feel me
SSE is all about the yield. And at 5.6%, covered 1.4 times, why not? SSE has been a solid long-term performer, delivering double the total return of the FTSE 100 over the past decade. That's the power of dividends, provided you reinvest them for growth.
If you want to be clever about it, you could hang on a bit to see if the share price drops, because at £14.27, it's only just short of its 52-week high. But that strategy could backfire if it climbs further. This is a defensive stock, and we live in uncertain times.
There is another reason to invest in SSE. From time to time, it is subject to takeover talk, which ramps up the share price. But mostly, you'll just want to feel that yield.
SSE trades on a modest forecast price-to-earnings ratio of 12.6 for March 2013, but utility investors have no need to feel sheepish. With a yield of 11 times Bank of England base rate, SSE looks positively carnivorous. If you invest for the long term, this stock should lift your animal spirits.
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