LONDON -- There are things to love and loathe about most companies. Today, I'm going to tell you about three things to loathe about FTSE 100 electricity group SSE (SSE 0.27%).
I'll also be asking whether these negative factors make SSE a poor investment today.
Regulation
Regulation can be a good thing or a bad thing. In the case of utilities, such as SSE, regulation goes hand in hand with a near-monopoly position in the market. Captive customers, good visibility of earnings, and the ability to borrow money at cheap interest rates are all positives.
At the end of the day, though, SSE is at the mercy of the regulator. The company is dependent on the regulator allowing the company to make an appropriate return for the equity risk taken by its shareholders. The regulator's view of what is an appropriate return may not be the same as an investor's.
Predictable dividend income is the main attraction of utilities for big pension funds as well as many small private investors. Yet in recent years, three of the five utilities that are currently constituents of the FTSE 100 have cut their dividends. SSE isn't one of them, but its dividends haven't been covered by free cash flow for a while.
The long wait for dividends
In a review carried out by the Munro U.K. Dividend Fund, SSE was the worst offender of the U.K.'s top 25 dividend payers for the delay between the company's year end and paying the dividend into shareholders' accounts.
Despite being unable to use the excuse of delayed receipt of overseas earnings for the late payment of dividends to its shareholders, "SSE's final dividend took an incredible 174 days after the financial year-end to be paid," The review also noted that while there was generally less of a lag for half-year dividends among the 25 companies, "SSE's delay ... hardly changed."
The uncertainty of succession
Every company loses its chief executive at some point. While it's hardly SSE's fault that its CEO, Ian Marchant, is stepping down this year, a change at the top always introduces a degree of uncertainty. And, as we all know, the market loathes uncertainty.
Having said that, the departure of the boss of a struggling company and the appointment of a new chief exec can lift investor optimism -- and the company's share price -- at a single stroke.
However, it's often the opposite when the departing CEO has been as successful as SSE's Marchant during his 10 years at the helm. It can take a few years for his replacement -- in this case, current deputy CEO Alistair Phillips-Davies -- to convince the market that he has the wherewithal to continue the work of his esteemed predecessor.
A poor investment?
The three things to loathe about SSE don't seem to me to be fatal to the investment case.
SSE has never yet cut its dividend, and the debt-rating agencies seem happy that the balance sheet and future cash flows can support a forward dividend that yields around 6% at a recent share price of 1,415 pence.
While it would be nice if SSE could permanently reduce the delay in paying its dividend, there would be only a one-time benefit for shareholders in shifting the whole cycle forward.
Finally, the new CEO was promoted from within and is an SSE veteran, which is about as good as can be hoped for by shareholders looking simply for more of the same from their highly successful company.
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