In a recent article, I ran the rule over Kingfisher (LON:KGF) and explained why it may be forced to follow in the footsteps of Vodafone Group (LON:VOD) and hack the dividend.
It’s very easy to be seduced by the pull of big dividend yields and to pay less attention to the state of a company’s profits outlook, capital expenditure levels, pension liabilities, debt levels, and so forth. And there’s no shortage of these danger stocks on the FTSE 100 that threaten to trap less-experienced investors.
One hella big risk! Once viewed as a safe-haven for income chasers, the ability of SSE (LON:SSE) (LSE: SSE) to keep lifting dividends year after year is slowly eroding. I used to own shares in the energy supplier but sold out once the crushing impact of the cheaper, independent suppliers on the company’s top line became apparent. The most recent financials released in February again vindicated my decision.
Back then, SSE declared it was scaling back its profits forecasts for the 12 months to March 2019 because of contract delays attributed to Capacity Market auctions, actions from the European Union, which are expected to have dented income for the period to the tune of £60m.
This wasn’t the most chilling aspect of the power play’s update, though. Instead, clear signs the rate of customer slippage is accelerating was the biggest cause for worry. SSE had around 5.88m clients on its books at the close of 2018, slumping by 160,000 from the 6.04m recorded just three months earlier, and down by more than half a million from the 6.45m recorded a year before.
And latest industry data suggests things have got even worse since the 2019 fiscal period ended. Indeed, Centrica (LON:CNA) earlier this week illustrated the impact of the recent price cap increases by Ofgem with news that it lost almost a quarter of a million accounts between January and April alone.
Stay away It’s no wonder that both Moody’s and Standard and Poor’s were minded to slash their ratings on SSE. While suffering a severe drop-off in revenues, the Footsie firm also faces the familiar problem of colossal capital expenditure bills to keep the country’s lights switched on.
It’s no wonder that SSE expects its adjusted net debt and hybrid capital mountain to keep rocketing, to £9.8bn in March, from £9.2bn a year earlier. And from where I’m sitting the balance sheet looks set to keep getting worse and worse.
Now City analysts expect SSE to announce a full-year dividend for the year just passed of 97.5p per share — up from 94.7p in the prior period — when it releases its finals on May 22. However, they also suggest time may be running out on the company’s progressive dividend policy and that it’ll cut the payout for the current fiscal period to 80p per share.
Sure, this projection may still yield an impressive 7.4%, but given the possibility of an even-larger reduction, and/or additional dividend cuts in the years ahead, I for one am not tempted to buy into the business today. Indeed, I reckon it’s an investment trap that’s best avoided at all costs.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019