Stock Analysis

SSE (LON:SSE) Will Pay A Larger Dividend Than Last Year At UK£0.60

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LSE:SSE
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The board of SSE plc (LON:SSE) has announced that it will be increasing its dividend on the 22nd of September to UK£0.60. This makes the dividend yield 5.4%, which is above the industry average.

Check out our latest analysis for SSE

SSE's Payment Has Solid Earnings Coverage

While it is great to have a strong dividend yield, we should also consider whether the payment is sustainable. Before making this announcement, SSE was paying a whopping 530% as a dividend, but this only made up 35% of its overall earnings. While the business may be attempting to set a balanced dividend policy, a cash payout ratio this high might expose the dividend to being cut if the business ran into some challenges.

Over the next year, EPS is forecast to fall by 45.4%. Assuming the dividend continues along recent trends, we believe the payout ratio could be 64%, which we are pretty comfortable with and we think is feasible on an earnings basis.

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LSE:SSE Historic Dividend June 19th 2022

Dividend Volatility

The company has a long dividend track record, but it doesn't look great with cuts in the past. Since 2012, the first annual payment was UK£0.80, compared to the most recent full-year payment of UK£0.86. Dividend payments have been growing, but very slowly over the period. It's encouraging to see some dividend growth, but the dividend has been cut at least once, and the size of the cut would eliminate most of the growth anyway, which makes this less attractive as an income investment.

We Could See SSE's Dividend Growing

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 8.7% per annum. Growth in EPS bodes well for the dividend, as does the low payout ratio that the company is currently reporting.

In Summary

Overall, we always like to see the dividend being raised, but we don't think SSE will make a great income stock. While the low payout ratio is redeeming feature, this is offset by the minimal cash to cover the payments. This company is not in the top tier of income providing stocks.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. Meanwhile, despite the importance of dividend payments, they are not the only factors our readers should know when assessing a company. Just as an example, we've come across 4 warning signs for SSE you should be aware of, and 2 of them are a bit unpleasant. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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