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Questor: ignore the profits warning and buy SSE for a reliable stream of dividends
Questor share tip: SSE's profits warning looks like a one-off and value should be unlocked by a change in structure
Regular readers will be well aware that this column’s forays into the utilities sector with National Grid and Severn Trent have hardly covered themselves in glory in capital terms.
But both have delivered the income we were seeking and in that respect they have done their job. As a result, this column is going back to the sector, undeterred, for a look at SSE.
This may look even more foolhardy given that the FTSE 100 company has just issued a profits warning. But the reasons for a big chunk of the setback could prove transitory, and a planned major change in group structure could unlock value.
The hot, calm summer hit SSE’s wind business and forced the firm to buy power in the open market to compensate for the renewables shortfall. That drove its Energy Management unit into loss. This may not be repeated and management’s commitment to an increased full-year dividend of 97.5p a share suggests they think as much.
Pending clearance from the competition authorities, possibly this month, SSE intends to merge its retail Energy Services operation with the Npower business owned by Innogy and then spin off the new entity next January. This will leave SSE’s shareholders with a two-thirds stake in the newly created venture.
Investors will also own the tightly regulated “core” SSE Networks arm, which comprises power generation, transmission and distribution. This year’s woes at Energy Management aside, it should be a dependable generator of profits, cash and above all dividends, and worthy of the attention of income-seeking investors.
Questor says: buy
Ticker: SSE
Share price at close: £11.27½
Update: CVS Group
This column still feels snakebitten by its selection of veterinary services group CVS in the spring of last year, and the market’s cool reaction to last week’s full-year results offers little immediate comfort. Ultimately, we mistook quality of earnings for safety, overpaid and suffered the consequences. Consider this a lesson learnt (again).
The good news is that sales grew by more than 20pc. The bad is that operating profit was flat as the firm had staffing shortages, had to pay up for quality vets and in some areas suffered lower sales than expected even when it found the right people.
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Concerns over whether Brexit will further hamper vet availability are likely to linger. As a result the shares are unlikely to go anywhere fast, especially as they still trade on more than 20 times forward earnings.
However, the Healthy Pet Club scheme continues to flourish, the benefits of last year’s acquisition of 52 surgeries have yet to be fully felt and demand is clearly there, as demonstrated by the top line, given the British love of their pets. Moreover, the board showed its confidence in the future by sanctioning an 11pc increase in the dividend to 5p.
It is also worth noting that private equity group BC Partners acquired VetPartners and its 260 sites for £700m over the summer, a vote of confidence in the resilience of the veterinary business overall.
It could be a long haul back but there seems no point in selling now to crystallise losses given the group’s long-term earnings power.
Questor says: hold
Ticker: CVSG
Share price at close: 940.5p
Update: Sky
Bingo. First tipped here at barely 900p in October 2016, satellite broadcaster Sky has fallen to a bid, as we thought it might, and for the very reasons we suggested: a terrific competitive position and copious free cash flow.
Comcast has won the auction with its offer of £17.28 a share and all that remains for investors to do is to follow the lead of 39pc stakeholder Disney (via Fox) and tender their shares to accept the bid.
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Otherwise they will be left with shares that do not trade and are not guaranteed to pay a dividend once Comcast takes full ownership.
Questor says: accept offer
Ticker: SKY
Share price at close: £17.26
Russ Mould is investment director at AJ Bell, the stockbroker