LONDON -- In early 2012, I bought into electricity utility SSE (LSE:SSE), attracted by its strong dividend history, reasonable valuation, and high yield -- just shy of 6%, well ahead of the FTSE All-Share's average of 3.5% or so. It would, I judged, make an ideal addition to my growing income portfolio.
And if you're a fellow SSE investor, then the odds are good that you, like me, were attracted by the SSE board's self-described "obsession" with dividend payouts to investors.
Hear it straight from the horse's mouth -- SSE itself: "We have just one strategic priority: sustained real dividend growth. SSE is one of just five FTSE 100 companies to have delivered a real dividend increase every year since 1999. Not only that, but we are ranked 10th among continuing FTSE 100 companies for Total Shareholder Return over that period."
Today, I'm up 25% -- having banked some juicy dividend payments along the way. But I'm contemplating selling, following the publication of troubling research.
Simply put, analysts at investment firm Miton have compared SSE's dividend growth with the growth in the company's free cash flow -- and found that dividends have been increasing faster than have the funds to pay for them.
The difference is made up by borrowings. And, what's more, by a form of borrowing that doesn't impact on the company's apparent gearing: 'hybrid capital', disclosed in a footnote in the accounts.
According to Miton, SSE has paid for dividends out of borrowings since 2008 -- and the "true" cash flow to shareholders has been negative since 2004.
A number of other utilities have been pursuing similar tactics -- among them National Grid,Pennon, United Utilities and Severn Trent.
So is it time to sell -- and put the proceeds to work elsewhere, in a share that is funding dividends from actual cash flow? This is, I have to say, something I'm actively contemplating.
Follow the money
Of course, in your own case, whether this research -- together with the current elevated share price and SSE's undoubted strong dividend history -- combine to make SSE a buy or a sell is something that only you can decide.
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Malcolm Wheatley owns shares in SSE, but in no other companies mentioned here. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.