Should I Buy SSE?

It's time to go shopping for shares again, but where to start? Macho miner BHP Billiton  (LSE: BLT.L  ) ? Cut-price Tesco  (LSE: TSCO.L  ) ? Or foodie favorite Associated British Foods  (LSE: ABF.L  ) ?

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.

One stock on Buffett's menu
If SSE doesn't light your fire, there are plenty of other sizzling stocks out there, including the one U.K. share that Warren Buffett loves.

This special in-depth report is completely explains exactly why Warren Buffett bought this share. Better still, it is completely free and without any obligation. Availability is strictly limited, so if you want to know the name of this company, please download it now.

Further Motley Fool investment opportunities:

Harvey Jones owns shares in BHP Billiton. He doesn't own shares in any other company mentioned in this article. The Motley Fool owns shares in Tesco. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
 


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2050341, ~/Articles/ArticleHandler.aspx, 10/30/2014 8:39:48 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement