It seems as though a week rarely passes without the domestic energy supply industry being in the headlines. Indeed, the Labour party in particular seems to be constantly reiterating what it is going to do regarding the sector, should it win the general election in 2015. This includes a new, tougher regulator as well as a price freeze. It is doing so at least partly because it is fighting the election on a view that, while the UK economy is improving, the UK is facing a standard of living crisis for which domestic energy suppliers are partly to blame.
Share Price Performance
Clearly, the uncertainty of the election is causing sentiment in Centrica and SSE to be weaker than it otherwise would be. Shares in the two companies have underperformed the FTSE 100 over the last three months, with SSE being down 2.6% and Centrica seeing its share price fall by 3.3%, while the FTSE is down 0.6% over the same time period.
However, one benefit of a subdued share price is that the yields on offer at SSE and Centrica are now better than they were a few months ago. Indeed, both companies offer top notch yields and impressive income potential. For instance, SSE currently yields a superb 5.9%, while Centrica is close behind on 5.6% both are well ahead of the FTSE 100s yield of 3.5%.
In addition, SSE is committed to increasing dividends per share by at least the rate of inflation, while Centrica is forecast to increase them by 3.1% in the next year alone (which is almost twice the current inflation rate). With quantitative easing having increased the money supply, higher levels of inflation could be around the corner, so both companies could become useful assets moving forward.
Certainly, there is a substantial amount of political risk surrounding both companies. If Labour do win next years election outright then they may introduce a tougher regulator that makes the sector more competitive, while a price freeze for two years would cause margins to be squeezed somewhat.
However, political risk appears to be priced in for both companies. For instance, SSE trades on a price to earnings (P/E) ratio of just 12.3, while Centricas is just 11.9 despite one-third of the company being involved in resource exploration and production, rather than supply.
As such, while investors should be mindful of the political risk that comes with investing in SSE and Centrica, in terms of sentiment being weak over the short term, shares in both companies appear to adequately price this risk in. As such, they appear to be worthwhile buys at present prices.
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Peter Stephens owns shares of Centrica and SSE. 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.