SSE powers up profits as it plans CEO succession

• Energy provider shows healthy increase in first-half profits
• Dividend grows again after cut last year
• Renewables drive paying off as FTSE 100 member sticks to 2027 profit goal
• Rising bond yields may explain share price's loss of momentum
• CEO to step down in 2025 after almost 12 years in charge

"SSE's ambitious plan to invest heavily in renewable energy is already paying off, as green sources of power represent 30% of the company's first-half profits and continue to underpin management's goal to increase profits by between 10% and 25% within the next three years," says AJ Bell investment director Russ Mould. "The share price seems unimpressed, as it sits 15% below September's peak, but that was an all-time high and the slide may be as much to do with rising bond yields as the fundamental prospects of the business.

"Whether the risk in the risk-free rate, as benchmarked here in the UK by the 10-year gilt yield, is down to concerns over the Budget, the UK's inflation and growth prospects, or a wider bond market revolt over sovereign debt levels in the West (or a combination of all three) is hard to divine.

"But the net result is the UK 10-year yield is getting close to 2023's peak, and that represented a mark previously seen in 2008.

Source: LSEG Refinitiv data

"This matters because utility stocks are often seen as 'bond proxies,' and held by investors for the income stream they offer through their dividends (rather like how bonds offer income via the coupons paid). Given that utilities, in theory, see relatively consistent demand and generate tightly regulated returns, the idea is that the dividends are fairly predictable and dependable, just like the interest payments on a bond, which usually come at a pre-set time, at pre-set intervals over the pre-determined life of the debt instrument.

"This can mean that utilities are valued on the basis of the yield they offer relative to the yield on the risk-free rate. If bond yields rise, the dividend yield becomes relatively less attractive, and vice-versa, especially as equities come with more risk than bonds - SSE did cut its dividend for the year to March 2024, after all, to help fund its Net Zero Acceleration Plan Plus (NZAP Plus) strategy, whereby the FTSE 100 index member will invest some £20 billion in renewable power projects between 2023 and 2027.

Source: Marketscreener, consensus analysts' forecasts and LSEG Refinitiv data

"SSE reduced its dividend by nearly 40% to 60p in its last financial year and as a result offers the lowest yield among the UK quoted utilities, so any sustained increase in bond yields may have a disproportionate impact upon the valuation of its shares. That said, the company is already in the process of rebuilding its distribution after the 6% increase in the interim payment to 21.2p a share.

Source: Company accounts, Marketscreener and consensus analysts' forecasts. Financial year to March.

"Dividend growth will be easier to sanction if profits and cash flow continue to flourish and SSE believes its heavy investment in renewables today will generate healthy medium-term returns, judging by the board's target of generating between 175p and 200p in adjusted earnings per share (EPS) in the year to March 2027, an uplift of between 10% and 25% from 2024's adjusted EPS tally of 158.5p.

Source: Company accounts, Marketscreener, consensus analysts' forecasts. *2027E based on mid-point of management's target range under the NZAP Plus. Financial year to March.

"SSE generates electricity from gas-fired power stations, on- and offshore wind farms and hydroelectric plants, and it also provides and runs electricity transmission and distribution networks. The good news is that SSE can already point to a substantial uplift in profits from its investment in renewables in the first half results for the year to March 2025.

Source: Company accounts. Financial year to March.

"Chief executive Alistair Phillips-Davies may therefore feel that SSE is on the right track as he prepares to step down in 2025, once a successor is identified, although it is possible that some shareholders might have liked him to see that NZAP Plus strategy through until its conclusion in 2027.

"Mr Phillips-Davies took the helm in summer 2013 and is thus approaching 12 years in charge, enough to make him the thirteenth-longest serving boss in the current FTSE 100 crop. His current tenure of 11.4 years is also more than double the 5.4-year average of current CEOs across the FTSE 100."

Source: Company accounts