SSE raises interim dividend by 3.6%

SSE Npower deal dividend

Dividend favourite SSE (LON: SSE) (SSE.L) reported interim results this morning.

The numbers didn’t make for particularly great reading with adjusted operating profit falling 8% and adjusted earnings per share falling 8.8% to 31.2p. However, importantly for income investors, the company raised its interim dividend by 3.6% to 28.4p.

SSE also announced that it is planning to merge its British domestic business with Npower to form a new energy company. Will that have implications for the dividend?

Committed to dividends

SSE places a strong focus on rewarding its shareholders through the payment of regular dividends.

The company stated today that it is expecting to report full-year earnings in line with analysts’ estimates of 116p per share, and that it is targeting an annual increase in the full-year dividend that is at least equal to RPI inflation. City analysts currently expect a full-year dividend of 94.2p which is a yield of 6.7% at the current share price.

SSE also stated that it is targeting a dividend increase of at least RPI inflation for next year. However, in regards to dividends after the 2018/19 year, the company said:

SSE’s dividend and dividend policy will reflect the quality and nature of its assets and operations, the earnings derived from them and the longer-term financial outlook.”

The company also stated that following the demerger: “SSE expects that its target for annual increases in the dividend per share will be at least RPI inflation.”

Low coverage

While those statements sound positive for future dividend growth, it’s worth noting that SSE’s dividend coverage isn’t particularly high. An estimated dividend coverage ratio of 1.23 times for this year doesn’t leave a huge margin of error.

Chairman Richard Gillingwater also noted that the operating environment is challenging right now, stating:

The operating environment continues to present a number of complex challenges to manage, with significant political and regulatory intervention an ongoing feature of the energy sector.”

Therefore, the investment case from a dividend investing perspective isn’t risk free. However, in the short term, it appears that SSE will keep lifting its dividend in line with RPI inflation.

Disclosure: Edward Sheldon, CFA has no position in any shares mentioned. 

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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