SSE's (LON:SSE) Dividend Will Be Reduced To £0.20

The board of SSE plc (LON:SSE) has announced that the dividend on 8th of March will be reduced by 31% from last year's £0.29 to £0.20. The dividend yield of 5.2% is still a nice boost to shareholder returns, despite the cut.

View our latest analysis for SSE

SSE's Earnings Easily Cover The Distributions

A big dividend yield for a few years doesn't mean much if it can't be sustained. Based on the last payment, the company wasn't making enough to cover what it was paying to shareholders. Without profits and cash flows increasing, it would be difficult for the company to continue paying the dividend at this level.

According to analysts, EPS should be several times higher next year. Assuming the dividend continues along recent trends, we estimate that the payout ratio could reach 52%, which is in a comfortable range for us.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2014, the dividend has gone from £0.842 total annually to £0.967. This works out to be a compound annual growth rate (CAGR) of approximately 1.4% a year over that time. We're glad to see the dividend has risen, but with a limited rate of growth and fluctuations in the payments the total shareholder return may be limited.

SSE Might Find It Hard To Grow Its Dividend

With a relatively unstable dividend, it's even more important to evaluate if earnings per share is growing, which could point to a growing dividend in the future. SSE has seen EPS rising for the last five years, at 50% per annum. EPS has been growing well, but SSE has been paying out a massive proportion of its earnings, which can make the dividend tough to maintain.

The Dividend Could Prove To Be Unreliable

In summary, dividends being cut isn't ideal, however it can bring the payment into a more sustainable range. While we generally think the level of distributions are a bit high, we wouldn't rule it out as becoming a good dividend payer in the future as its earnings are growing healthily. This company is not in the top tier of income providing stocks.

Companies possessing a stable dividend policy will likely enjoy greater investor interest than those suffering from a more inconsistent approach. However, there are other things to consider for investors when analysing stock performance. To that end, SSE has 4 warning signs (and 1 which is a bit concerning) we think you should know about. If you are a dividend investor, you might also want to look at our curated list of high yield dividend stocks.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.