Is Now the Time to Buy SSE PLC?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at SSE (SSE -0.84%) to determine whether you should consider buying the shares at 1,417 pence.

I am assessing each company on several ratios:

• Price/Earnings (P/E): Does the share look good value when compared against its competitors?
• Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?
• Yield: Does the share provide a solid income for investors?
• Dividend Cover: Is the dividend sustainable?

So let's look at the numbers:

The consensus analyst estimate for this year's earnings per share is 115 pence (up 2%) and dividend per share is 84 pence (up 5%).

Trading on a projected P/E of 12.3, SSE appears to be cheaper than its peers in the Electricity sector, which are currently trading on an average P/E of around 14.2. SSE's average P/E and slow near-term growth rate give a PEG ratio of around 6, which implies the share price is expensive for the near-term earnings growth the firm is expected to produce.

Offering a 5.7% yield, the dividend is just above the sector average of 5.5%. Furthermore, SSE has a three-year compounded dividend growth rate of 14%, implying the yield will continue to stay above that of the company's peers.

Unfortunately, the dividend is only around one-and-a-half times covered, which I feel does not give SSE too much room for further payout growth.

SSE looks cheap but, with growth slowing, is the company a good income stock?
As I say, SSE's near-term growth does appear to be stalling. However, the group is working hard to cut expenses and improve profitability. Indeed, SSE has recently announced a 50% gas 'off-take' agreement with BP in the North Sea, in an attempt to reduce the group's operating costs.

In addition, SSE recently reported gas demand up 2% and electricity demand up 4% from its customers due to the colder winter weather, which to some extent offset the group's customer base falling 1%.

Despite these positive points, though, I am worried about the group's financial position.

In particular, SSE's operating cash flow, which for the year ending March 2012 was negative, was assisted by the company having to borrow £1 billion to fund the dividend.

Furthermore, within SSE's subsequent half-year results, the company's cash flow continued to come under pressure and once again SSE was forced to issue a further £1 billion of debt to cover dividend payments. All this indicates to me that SSE could be forced to reduce its dividend in the not-to-distant future.

Nonetheless, for the time being I believe the 5.7% income looks safe and SSE continues to follow a progressive dividend policy.

So overall, I believe now looks to be a good time to buy SSE at 1,417 pence -- albeit with one eye kept on the firm's debt level.

More FTSE opportunities
As well as SSE, I am also positive on the FTSE shares highlighted in "8 Dividend Plays Held by Britain's Super Investor." This exclusive report reveals the favorite income stocks owned by Neil Woodford -- the City legend whose portfolios have thrashed the FTSE All-Share by 200% during the 15 years to October 2012.

The report, which explains the full investing logic behind Woodford's dividend strategy and his preferred blue chips, is free to all private investors. Just click here for your copy. But do hurry, as the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

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