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SSE - guidance raised

Full year earnings per share are expected to be at least 90p, up from previous guidance for 83p...

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Full year earnings per share are expected to be at least 90p, up from previous guidance for 83p, as performance from the flexible thermal and hydro plant offset lower-than-planned renewables output.

The group intends to offer an 81p dividend for the full year, which will be adjusted upward for inflation. This will be reset to 60p in 2024/25 with 5% increases in the following two years.

The shares rose 1% following the announcement.

View the latest SSE share price and how to deal

Our view

SSE's doubling down on its pivot toward renewable energy in an effort to keep up with increasing calls for greener energy. But the division's poor performance in the first half of the financial year underscores the risks of pouring cash into an unproven part of the business with uncertain returns.

Networks is SSE's core business, delivering electricity across Scotland and Southern England. It also owns high voltage transmission cables in the Scottish Highlands and Islands. 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. Although the dividend was cut when the retail division was sold, the shares currently offer a prospective yield of 5.6%. Remember yields are not a reliable indicator of future income and dividends could be cut further at a later date. They are variable and not guaranteed.

Regulated profits have tended to be relatively predictable, but they're unlikely to grow quickly, which makes renewable energy SSE's growth engine.

Renewables made up about 49% of underlying operating profits last year, but the plan is a fivefold increase in capacity to 50TW per year by 2031. This represents a marked increase in management's goals for the division that will require a substantial £12.5bn investment over the next 5 years split evenly divided between Networks and Renewables at 40% each, with the remainder divided between other parts of the business.

Cash has been something SSE has found hard to come by in the past. It hasn't always generated enough to cover the multi-billion pound 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.

A moderate level of debt is no bad thing, especially for a business with such reliable revenues, but it's still important to keep liabilities in check. 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%.

There are external threats as well. A tougher regulatory regime is on the horizon, which will likely see profits squeezed as the regulator puts pressure on prices while increasing performance expectations. SSE's final proposal includes a £4bn investment to prepare for increasing electric needs.

The combination of reliable networks and growing renewable energy businesses sounds attractive, but it's costly and adds a layer of risk until SSE starts 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 it's still unclear whether the renewables business can generate the necessary returns and there are no guarantees.

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.

Trading Update

In the 9 months to 31 December, Renewables output was 1.4TWh, 19% below plan due to a lack of wind and rain in the summer months. Distribution delivered 1TWh more than it did last year during the period and Thermal saw output decline 14%.

The group's on track to spend over £2bn on capital expenditure this year, and net debt is expected to come in around £9bn including the proceeds from the planned disposal of Scotia Gas Networks.

SSE's refreshed its 2030 business goals to reflect progress so far. The group revised its carbon intensity reduction target to 80% from 60% and revised down the number electric vehicles it could support on its networks from 10m to 2m.

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
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 8th February 2022