Tuesday, 7 May 2013


SSE (formerly Scottish & Southern Energy) is one of the UKs 'big six' energy suppliers providing gas and/or electricity to around 10 million customers throughout the UK and Ireland.

It has been in my income portfolio for many years and has provided a steadily rising dividend which has kept pace with inflation.

I was a little concerned to read this article in the Telegraph which drew attention to some utility companies paying dividends out of borrowings. The managers of Miton UK Value Opportunities looked at these large utility companies and found that 5 out of the 6 had negative cash flows - regarding SSE :

"SSE, formerly known as Scottish & Southern Energy, will have a positive "headline" cash flow of 3.8pc this year, according to analysts' forecasts compiled by Bloomberg. However, it will pay a dividend yield of 5.38pc.
After all costs are taken into account, Ms Hamilton calculated that it would lose cash to the tune of 4.5pc. In other words, it will pay its dividends out of borrowings, rather than from cash generated by the business – as it has since 2008, the managers said".

This started alarm bells ringing and when I had a closer look at the latest accounts, it seems clear the borrowings have steadily risen in recent years and gearing is now over 200%.

The share price has seen a good run in recent months and is up around 10% since the start of 2013.

Given the concerns over gearing and the question mark on dividend sustainability, I decided to let this one go and sold today at 1555p.


  1. Hi John,

    I don't blame you for that. Going back to the recent article I did on "quality", utilities generally don' tick this box in my opinion. They generally have very high capex requirements, low return on capital (partly enforced by regulation), poor cash flow and therefore a need for more and more debt. In SSE's case you are right that the gearing has been increasing, and the overall capital appears to be increasing at a much greater rate than profits (i.e. a reducing ROCE). I suppose the question is: will all that investment in wind farms pay off down the road as the benefits aren't that clear at the moment?


    1. Hello MI,

      Thanks for confirming my general understanding - sometimes the debt situation can be a little complex.

      I have decided to move down the yield ladder and up the quality scale and have recycled the proceeds into more Unilever.

      Maybe I will cover the topic of company debt and gearing in a future article.

    2. John,

      I suppose the main caution on moving up the quality scale is ensuring that we don't end up over-paying for it, which is a problem I am facing at the moment. A lot of the shares I am keen on (including ULVR) have been pushed well above my target price in recent weeks. It's one thing to find good companies and another thing entirely to find them at the right price! I'm rather hoping Mr Market will have a summer sale on soon...

  2. MI,

    Agreed, its better to buy at a lower price but will we have a Summer sale...I'm not so sure. In any event, with the lengthy time scale I envisage holding ULVR, its probably not going to make a great deal of difference.

    As the sage says, better to buy a great company at a reasonable price rather than an average company at a great price!(or words to that effect...)