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SSE - full year EPS guidance upgraded again

SSE upgraded its full-year Earnings Per Share (EPS) guidance from at least 150p to more than 160p.

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SSE upgraded its full-year Earings Per Share (EPS) guidance from at least 150p to more than 160p. This reflects a "strong performance" from flexible generation to boost supply, which more than offset lower than planned renewables output.

SSE remains on course to deliver record investment this year, in excess of £2.5bn.

The intention to pay a full-year dividend of 85.7p per share plus RPI for 2022/23 has been reiterated. This is expected to drop to 60p in 2023/24 to help support the group's "significant" investment and growth plans. Thereafter SSE intends to increase dividends by at least 5% per year for the next two years However, no dividends can be guaranteed.

The shares 2.8% following the announcement.

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Our view

SSE's upgraded its earnings guidance twice since the new year, as a result of a strong performance from the group's flexible gas-fired plants.

Looking ahead, SSE's staying the course with its pivot towards renewable energy. Turbo-charging efforts to renewables is a bold and admirable move. But the shift to renewables comes with a hefty dose of risk - they're not always reliable. To some degree, it's at the mercy of mother nature. Unseasonably calm and dry weather this winter left the group's renewable output lower than planned meaning flexible gas-fired plants will still have to plug the energy shortfall for now. Fortunately, these are also part of SSE's offering and can help to smooth its revenue profile.

That brings us to Networks, delivering electricity across Scotland and Southern England. This is classic utility territory - with revenues predictable and profits closely regulated. Historically utilities have been able to pay attractive dividends, and SSE has been no exception.

However, in a bid to free up cash for growth and further renewables investment, the group now plans to rebase its dividend from more than 85p down to 60p, beginning in 2023/24. This is a stark reminder that dividends are variable and not guaranteed. The group needs to strike a delicate balance between positioning itself for future growth and keeping the cash coffers from running dry. The scrip dividend, where dividends are paid in shares rather than cash, is helping ease the burden short term, but has been capped at 25%.

Cash has been something SSE has found hard to come by in the past. It hasn't always generated enough to cover its enormous infrastructure bill, and fund the dividend as well. As a result, keeping net debt to adjusted cash profits (EBITDA) in line has relied on asset sales. While a moderate level of debt is no bad thing, especially for a business with such reliable revenues, it's still important to keep liabilities in check. Time will tell if SSE further reduces its ownership of its core businesses to generate cash.

There are external threats as well. Regulatory challenges loom, particularly as ballooning energy prices compound the cost-of-living squeeze that most are enduring at present. Weaning the UK off its gas dependency may help to mitigate this in the future.

The combination of reliable networks and growing renewable energy businesses sounds attractive, but it's costly and adds a layer of risk until SSE can start generating cash more reliably. If SSE gets this transition right investors could enjoy a more sustainable dividend with the potential to grow over time, but "if" is doing a lot of the work.

SSE key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 30th March 2023