6.1 Reasons SSE Might be a Buy

11/01/2013 12:00 pm EST


Royston Wild

Equity Market Sector Correspondent, Shares Magazine

Either despite the fact that this company has recently faced pressure, or maybe because of this, Royston Wild of The Motley Fool UK, feels shares of this company look set to head skywards.

Today I am stating why I believe SSE (LSS:SSE) (OP:SSEZY) remains a smashing stock selection for those seeking massive dividend potential.

A dependable dividend winner

Shares in electricity play SSE have come under pressure in recent weeks, initiated by Labor leader Ed Miliband's call for 20-month bill freezes across the energy sector in mid-September, and worsened by a spate of subsequent gas and electricity price hikes by the country's largest suppliers. SSE itself plans to raise bills by an average 8.2% from next month.

This has prompted fears over the possible introduction of profits-curbing legislation for the big six providers, although personally, I believe that the current maelstrom over high energy bills is unlikely to translate into revolutionary action against energy companies and their pricing strategies. With this in mind, I reckon that SSE—with a prospective dividend yield of 6.1%—should maintain its generous payout policy well into the future, as earnings should continue rolling higher.

Needless to say, governments require the services of these entities in order to keep the power flowing into people's homes, and Prime Minister David Cameron's proposals last week—to scale back green charges, rather than take on the energy suppliers, as a means to reduce people's utility bills—illustrates the reality that politicians are reluctant to hamper the way that these firms operate.

Instead, I believe SSE's recent share price collapse has sweetened the investment case for those seeking access to chunky dividend income. The electricity giant's forecast 88.2p per share dividend for the year concluding March 2014 is a 4.8% increase from 84.2p last year, and currently generates the aforementioned 6.1% dividend yield.

This rises to 6.3% for the following 12-month period, based on current City projections, with an anticipated dividend of 92.1p per share, representing growth of 4.4% from the current year. And due to the aforementioned recent price weakness, I believe that SSE—which currently trades on a P/E rating of 12.1 for 2013—offers sterling dividend potential at sector-busting value for money.

Indeed, the wider electricity space boasts an average forward dividend yield of 3.3% and carries a P/E multiple of 17.8. Meanwhile, the gas, water, and multi-utilities sector boasts a corresponding yield of 4.4% and deals on an elevated P/E readout of 28.5. I am already a buyer of SSE and, due to the relative cheapness of the stock at current levels, I plan to dive back in and load my portfolio with more of the power play.

Royston owns shares in SSE.

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