Presents all around! SSE is the latest UK energy company to give a gift to customers — 4.1% lower gas prices from 30 April and an extension of the electricity price freeze.
Investors will be less excited than customers, but the news was expected. Five of the six major power suppliers to Britain — all but EDF — have cut tariffs in the past month. The pressure has been on: in mid-January, energy minister Matthew Hancock wrote to the big six, demanding price cuts.
The cuts range between 3.5 and 5 per cent, far less than the over 20 per cent fall in forward prices for wholesale power, coal and natural gas since November. Wholesale energy prices make up only half of the retail price and given that companies hedge their supply, the benefit to the power providers comes slowly. Explaining this to politicians must be one of the great pleasures of running a power company.
SSE has also promised to raise its dividend at least in line with retail price index inflation, in spite of falling consumption and fewer customers. The company has made progress on cost savings and free cash flow has covered dividends for the past five years. SSE’s dividend yield of 6 per cent is in line with that of Centrica, the parent company of British Gas. The high yields reflect some expectation of a dividend cut — which, with an election 100 days away, is reasonable.
The victory of the anti-austerity party in Greece, and the rise in support for the UK independence party, have both the Conservatives and Labour making populist noises. And the Competition and Markets Authority is investigating if the UK energy market is competitive. Enabling customers to switch has proven only mildly effective. Between 2 and 3 per cent switched in the third quarter of 2014. The CMA plans a provisional report this summer. While the dividend is appealing (especially combined with a price/earnings ratio of just 13), political and regulatory overhang mean the shares are a gift only for risk-seekers.
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