When it comes to defensive stocks, utility companies are pretty much in a league of their own. The combination of relatively consistent earnings and chunky dividends has long appealed to investors, particularly those with a low tolerance to risk.
That said, some utilities are more profitable and consequently more rewarding to shareholders than others. With this in mind, lets look at the latest figures from 15bn cap energy providerSSE (LSE: SSE) and ask what impact, if any, todays update will have on its ability to pay its already sizeable yield.
Return toform?
A cold end to 2016 and a subsequent rise in consumption was good news for SSE, even if Britains second biggest energy supplier also reported losing 50,000 customer accounts in Q3. As a result, the companystated that it remains on target to return to growth and achieve earnings per shares of at least 120p for 2016/17 financial year.
Nevertheless,CEO Alistair Phillips-Davies reflectedthat volatile wholesale energy market conditions and reduced levels of renewable energy output mean that SSEsoperating environment continues to be challenging, although lesswet and windy weather in November and Decemberdid allow the company to make progress with construction projects.
While investors will cheer the prospect of a return to form as far as earnings are concerned some of whichwill come from the companys plans to use 500m from a recent divestment to buy back its shares its SSEs juicy 6% yield that many will be most concerned about.
As far as dividendgrowth is concerned, SSE highlighted its commitment to ensuring thatits full year payout keeps pace with RPI inflation. The company also statedthat it would continue to have this target in the years ahead.
Of course, dividends are only sustainable if they are adequately covered by earnings something that shareholders of SSE will be only too aware of. Over the past few years, cover has dipped to worryingly low levels 0.62 times in 2015, followed by 0.51 times last year, raising the possibility of a cut.
So it will come as a relief thattodays update reiterated SSEs expectations from its interim results that dividend cover would range from around 1.2 1.4 times until 2018/19, assuming it is able to meet the aforementioned commitment. Based on this, it would seem that dividends at SSE are safe for now.
A betteralternative?
Trading on a price-to-earnings ratio (P/E) of 12 for 2017, SSE is less expensive than industry peer Centrica, which is currently on14. Nevertheless, bothcompanies remain susceptible to political and regulatory scrutiny, which may put some investors off.
If the potential for political meddling concerns you, shares in National Grid (LSE: NG) might be a sound alternative.While the rate of earningsgrowth at the 35bn capmight not be explosive with earnings per share growth of 1.5% and 4.3% penciled infor 2017 and 2018 respectively its status as a solid, dependable dividend payer is rarely questioned. A yield of 4.8% this year rises to 5.5% in 2018, even thoughcover is expected to dip to 1.27.
Trading on just under 15 times earnings for 2017, shares in National Grid look reasonably priced, even if they are dearerthat those of SSE. Theyre also quite a bit cheaper than they were in the immediate aftermath of last years referendum vote, during which shares in the companyshot up almost 16% as investors soughtsafety in their droves.
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Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.