UK utility stocks have been poor performers in recent years. Over the five years to the end of June, the FTSE All-Share Utilities Index delivered a total return of near enough zero. Utilities’ dividends were generous, but simply weren’t enough to make up for declines in their share prices.
Are companies like FTSE 100 giant SSE (LSE: LON:SSE) and smaller player Jersey Electricity (LSE: JEL) now bargain buys or value traps? Here, I’ll give my views on the prospects for these two stocks.
Out of favour About half of SSE’s five-year share price decline of 26% has happened over the last 12 months. Headwinds have included tougher regulation, competition in retail supply, and rising concern about the Labour Party’s manifesto commitment to renationalise utilities.
It’s perhaps not surprising many SSE investors have headed for the exit. However, at a share price of 1,094p, the company is now lowly valued. It trades on a forward 12-month price-to-earnings (P/E) ratio of 11.4, with a prospective dividend yield of 7.4%.
Attractive for high-income seekers It was disappointing that SSE’s plan to merge its retail business with Npower’s fell through last year. However, while pickings aren’t as rich as they once were in retail supply, the business is still nicely profitable. Management continues to work on securing its future outside of SSE, my Foolish colleague Roland Head suggesting, “perhaps in combination with a smaller energy retailer with a sharper focus on marketing.”
I think the medium-to-long-term outlook for SSE looks good. The UK has become the first major economy to legislate for net zero emissions by 2050. And SSE is positioned well, with its “strategic focus on regulated electricity networks and renewable energy, and our commitment to creating value through the low carbon transition.”
As to nationalisation risk, there are significant political, legal and practical obstacles. As I’ve discussed previously, there are good reasons for thinking investors would be fairly compensated, if it came to it. As such, I rate SSE a ‘buy’ today, with the dividend yield being particularly attractive for high-income seekers.
Standing the test of time I think there’s even lower nationalisation risk with Jersey Electricity. Here, 62% of the shares are owned by The States of Jersey (the government of the British Crown Dependency), while the remainder have traded on the London stock market for over 50 years. Westminster retains the right to legislate for British Crown Dependencies against their will, although the Attorney-General of Jersey reckons this right may have become unenforceable by a long habit of non-enforcement (the legal doctrine of ‘desuetude’).
Having said that, there have been calls on the island itself over the years for the States of Jersey to take back full control of Jersey Electricity. However, the structure of the company appears to have stood the test of time, and to work pretty well for all stakeholders, including shareholders.
Risk diversifier The Jersey Electricity share price hasn’t declined as much as SSE’s over the last 12 months, being down less than 2% (and modestly positive when dividends are included). Over five years, the shares are up 35%, making it a notable sector outperformer.
Despite this performance, the valuation remains reasonable. At a share price of 444p, the forward 12-month P/E is 12.5 and the prospective dividend yield is 3.7%. I rate the stock a ‘buy’ as a nice little risk diversifier in the sector.
G A Chester 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