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of SSE (LSE: SSE) shares are up 20% from their November lows. City analysts Profit forecast in order to FTSE100 Utility based on strong trading, investors are embracing the good news.
SSE’s projected dividend yield of 5.5% may also have attracted buyers looking for above-market income. Unfortunately, despite the company’s increasing profits, this payment may not be as secure as it seems.
I’ve been reviewing SSE stock today to see if it’s worth buying. This is what I decided.
Earnings up, outlook bright
There is no doubt that the prospects for this business are improving. In January, SSE said higher energy prices and a strong performance in its gas generation business would push its profit this year above previous forecasts.
This bullish outlook was maintained despite mild winter weather that resulted in lower-than-expected output from the Group’s wind farms.
As a result, the company expects an adjusted earnings of at least 150p per share for the year ending 31 March. This is a 25% increase from the previous guidance (November) of at least 120p.
These numbers show the price of SSE stock at 12 times expected earnings, which I don’t think is too high. However, there are some things to be aware of.
SSE is already the UK’s largest renewable energy generator, but the company plans to invest heavily to expand its capacity over the next few years.
One focus is on upgrading the grid so that wind power can be transferred from the north of Scotland to locations of higher demand further south.
The company is also investing in capacity to support an additional 50GW of offshore wind farms by 2030. There is currently a general shortage of capacity to connect new wind farms.
SSE expects to invest a total of £12.5bn (around £2.5bn each year) in net zero projects between 2021 and 2026.
This hefty spending means that even if profits look healthy, cuts may be needed elsewhere.
Dividend cut next year
Almost certain one cut is SSE’s dividendFor some time, the company has warned investors that it will be cut to a new base level of 60p per share for the 2023/24 financial year.
With this in mind, the expected dividend for 2022/23 is 85.7p per share. A reduction to 60p equates to a 30% reduction.
For what it’s worth, I think the cut is probably wise. SSE needs to invest and the company’s ability to assume additional debt is limited. I think a dividend cut is the right option.
However, shareholders will face a significant reduction in income.
This year’s planned payout of 87.5p gives a dividend yield of 5.5% at current levels.
Next year’s expected 60p payout would cut that yield to just 3.5%.
I think SSE is a good business, but I think the stock is probably over 1,700 pence.
My guess is that there will probably be better buying opportunities over the next 12 months when energy prices return to normal levels.
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