Stock Analysis

Should You Be Adding SSE (LON:SSE) To Your Watchlist Today?

  •  Updated
LSE:SSE
Source: Shutterstock

It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses.

If, on the other hand, you like companies that have revenue, and even earn profits, then you may well be interested in SSE (LON:SSE). While profit is not necessarily a social good, it's easy to admire a business that can consistently produce it. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.

Check out our latest analysis for SSE

How Quickly Is SSE Increasing Earnings Per Share?

If you believe that markets are even vaguely efficient, then over the long term you'd expect a company's share price to follow its earnings per share (EPS). That makes EPS growth an attractive quality for any company. As a tree reaches steadily for the sky, SSE's EPS has grown 25% each year, compound, over three years. If the company can sustain that sort of growth, we'd expect shareholders to come away winners.

One way to double-check a company's growth is to look at how its revenue, and earnings before interest and tax (EBIT) margins are changing. SSE shareholders can take confidence from the fact that EBIT margins are up from 26% to 39%, and revenue is growing. That's great to see, on both counts.

You can take a look at the company's revenue and earnings growth trend, in the chart below. Click on the chart to see the exact numbers.

earnings-and-revenue-history
LSE:SSE Earnings and Revenue History May 29th 2022

In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of SSE's forecast profits?

Are SSE Insiders Aligned With All Shareholders?

Like that fresh smell in the air when the rains are coming, insider buying fills me with optimistic anticipation. This view is based on the possibility that stock purchases signal bullishness on behalf of the buyer. However, insiders are sometimes wrong, and we don't know the exact thinking behind their acquisitions.

We haven't seen any insiders selling SSE shares, in the last year. With that in mind, it's heartening that Angela R. Strank, the Independent Non-Executive Director of the company, paid UK£8.9k for shares at around UK£18.49 each.

Along with the insider buying, another encouraging sign for SSE is that insiders, as a group, have a considerable shareholding. To be specific, they have UK£10m worth of shares. That's a lot of money, and no small incentive to work hard. Even though that's only about 0.05% of the company, it's enough money to indicate alignment between the leaders of the business and ordinary shareholders.

While insiders are apparently happy to hold and accumulate shares, that is just part of the pretty picture. The cherry on top is that the CEO, Alistair Phillips-Davies is paid comparatively modestly to CEOs at similar sized companies. I discovered that the median total compensation for the CEOs of companies like SSE, with market caps over UK£6.3b, is about UK£4.1m.

The SSE CEO received UK£3.0m in compensation for the year ending . That comes in below the average for similar sized companies, and seems pretty reasonable to me. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of good governance, more generally.

Does SSE Deserve A Spot On Your Watchlist?

Given my belief that share price follows earnings per share you can easily imagine how I feel about SSE's strong EPS growth. Better still, insiders own a large chunk of the company and one has even been buying more shares. So it's fair to say I think this stock may well deserve a spot on your watchlist. You still need to take note of risks, for example - SSE has 4 warning signs (and 2 which shouldn't be ignored) we think you should know about.

As a growth investor I do like to see insider buying. But SSE isn't the only one. You can see a a free list of them here.

Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.

Valuation is complex, but we're helping make it simple.

Find out whether SSE is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis