Another sector at risk of government interference is the energy sector with talk of price freezes, business separation and greater regulation.
Given the electoral deadlock being played out in the polls some of the more radical measures may never make the transition from paper to reality, but investors still need to be aware of them.
In the event that the Labour party is able to form a government and able to implement its manifesto pledges after the election on May 8th, then investors should focus on the energy sector which could well be affected by a Labour win, particularly given that these stocks are key contributors to UK pension funds with their above average dividends, and these could well be at risk:
Currently the sector is undergoing a review by the (CMA) Competition and Markets Authority to determine whether they are abusing their market position, so any changes may well come after the commission has reported at the end of this year.
Energy markets – Labour will “freeze energy bills until 2017, ensuring that bills can fall but not rise” and will give the regulator the power to cut bills this winter. During the freeze, they have pledged to reform the energy market so that it delivers fairer prices and a better deal for working families. The generation and supply businesses of the ‘Big Six’ energy companies will be separated. They will be required to open up their books, and they will have to sell their electricity through an open exchange.
With lower oil and gas prices, it is important not to underestimate the impact of these proposed measures given that future infrastructure spending could well be affected, along with the profitability of the industry as a whole, if government intervention sees these companies cut future investment on the UK’s future energy requirements, which remain quite substantial, if the government is to meet its new green targets.
Centrica (LONDON:CNA), current dividend yield 5%, headquartered in Windsor the company is the largest supplier of gas to UK businesses and households, as well as a key electricity supplier. The company is also a key player in the areas of exploration and production, and given the looming power crunch towards the end of the decade is a key player in keeping the UK’s heating and lights on.
It also has operations in the Netherlands, Norway and the US and has sizeable interests in renewables, with a wind farm development with a number of new developments in the pipeline. It also operates the UK’s largest storage facility for gas, which is located in the North Sea, off the east coast of Yorkshire.
In 2014 the company posted a pre-tax loss of £1.4bn, and cut its dividend by 21% on the back of the recent sharp falls in oil and gas prices. The shares have dropped sharply from highs of 400p since Labour leader Ed Miliband announced his intention to freeze energy prices in September 2013. These declines gained traction in the middle of 2014 when oil prices started to their fall, dropping from 330p to current levels, in the process inviting some speculation about a possible takeover bid.
This seems unlikely given the uncertainty surrounding the next UK government and the ongoing CMA investigation.
The company also announced a 40% cut to its capex outlook, and with a strategic review due to be completed by July 2015 when it announces its interim results, future investment plans could become more uncertain if the Labour government follows through on its manifesto plans.
The current dividend is covered at 1.4 which makes it vulnerable to further reductions, unless the company is able to improve its operating margins, which is likely to be difficult if the companies can’t raise their prices in line with the broader market.
SSE (LONDON:SSE) (Scottish and Southern Energy), current dividend yield 5.3%, headquartered in Perth, Scotland the company is involved in the generation and supply of both electricity and gas, and is the second biggest supplier of both in the UK.
It includes Southern Electric, SWALEC and Scottish Hydro Electric. The company also has significant interest in renewables projects including wind and biomass.
The share price performance since that Miliband speech has been much steadier but the outlook remains no less uncertain with the dividend cover also on the low side at 1.4, and expected to fall to 1.2, though operating margins are expected to improve.
National Grid (LONDON:NG), current dividend yield 5%, headquartered in London its principal activities are in the transmission and distribution of electricity and gas in the UK, and it also has operations in the US, predominantly in the North Eastern US.
In running and attempting to keep up to date the UK’s creaking energy infrastructure the company could still find itself under scrutiny in the context of what it charges the utility companies to use its networks. The SNP has already argued that transmission charges should be reduced for renewable energy sources like off shore and on shore wind power. This could be significant if the SNP helps prop up a Labour administration after the 7th May.
This has repercussions in the context of building extra capacity in the power grids, particularly if National Grid is prevented in levying the charges it needs to in order to increase capacity.
The current dividend is covered at 1.6, which is border line but could be vulnerable to further reductions, unless the company is able to maintain its operating margins, which is likely to be difficult if the companies doesn’t have full flexibility on prices in line with the broader market.
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