Stock Analysis

SSE (LON:SSE) Will Pay A Larger Dividend Than Last Year At UK£0.26

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The board of SSE plc (LON:SSE) has announced that it will be increasing its dividend on the 10th of March to UK£0.26. This makes the dividend yield 5.1%, which is above the industry average.

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SSE's Dividend Is Well Covered By Earnings

We like to see robust dividend yields, but that doesn't matter if the payment isn't sustainable. Prior to this announcement, SSE's dividend was only 32% of earnings, however it was paying out 219% of free cash flows. The business might be trying to strike a balance between returning cash to shareholders and reinvesting back into the business, but this high of a payout ratio could definitely force the dividend to be cut if the company runs into a bit of a tough spot.

Looking forward, earnings per share is forecast to fall by 65.3% over the next year. Assuming the dividend continues along recent trends, we think the payout ratio could reach 92%, which is definitely on the higher side.

LSE:SSE Historic Dividend December 18th 2021

Dividend Volatility

Although the company has a long dividend history, it has been cut at least once in the last 10 years. The first annual payment during the last 10 years was UK£0.75 in 2011, and the most recent fiscal year payment was UK£0.82. Dividend payments have grown at less than 1% a year over this period. The dividend has seen some fluctuations in the past, so even though the dividend was raised this year, we should remember that it has been cut in the past.

The Dividend Looks Likely To Grow

With a relatively unstable dividend, it's even more important to see if earnings per share is growing. SSE has seen EPS rising for the last five years, at 26% per annum. Earnings have been growing rapidly, and with a low payout ratio we think that the company could turn out to be a great dividend stock.

In Summary

In summary, while it's always good to see the dividend being raised, we don't think SSE's payments are rock solid. While SSE is earning enough to cover the payments, the cash flows are lacking. We don't think SSE is a great stock to add to your portfolio if income is your focus.

Investors generally tend to favour companies with a consistent, stable dividend policy as opposed to those operating an irregular one. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. To that end, SSE has 5 warning signs (and 2 which are a bit unpleasant) we think you should know about. We have also put together a list of global stocks with a solid dividend.

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