The British government recently announced that a windfall tax on oil and gas companies would not be extended to electricity generators – boosting shares across the sector with a visible jump, including two promising dividend stocks.
Leading players SSE’s (GB:SSE) shares jumped 3.5 %. Shares in National Grid (GB:NG) were up by 1.5% in the wake of the news.
In terms of year-to-date performance, SSE is ahead with a 6.8% return, compared to 1.02% for National Grid.
The main attraction – dividends
The utility sector doesn’t attract a lot of value investors, as it is relatively mature. The main attraction is dividends: these companies are good dividend payers as both product demand and earnings are stable.
Both National Grid and SSE tick this box for investors.
SSE has a 4.85% dividend yield, slightly higher than National Grid at 4.7%. The utility sector average is 3.1%.
Keeping the dividends sustainable will be a challenging task for National Grid, due to its cash position. The company’s net cash flow is at -£1,617 Million in FY 2021/22. Its net debt is also increasing YoY, and the company is supporting its dividends from its debt.
By contrast, SSE has a focused dividend plan starting from 2023/24, which includes paying £3.50 per share over five years.
The company has recently announced that it will increase its dividend to £0.60. This will push the payment yield to 5.1%, way higher than most of its competition.
Robust business
National Grid’s business infrastructure is strong. The company operates electric and gas transmission networks in England and Wales, operating a monopoly in some parts of the UK power system.
The company previously announced plans to sell a portion of its gas business and concentrate on electricity. This further reduces the risk exposure in that segment.
Multinational energy company SSE is more diversified with segments including onshore and offshore wind, hydropower, electricity transmission, and distribution grids.
The company is highly optimistic about its earnings as it increases its investment in renewable sources. SSE aims to increase its renewable output by five times by 2031. With its Net Zero Acceleration Programme, the company will deliver 20% of the UK’s 50GW offshore wind target by 2030 and over 20% of the upcoming electricity network investment in the UK.
SSE’s earning-per-share compound annual growth rate CAGR is projected at 7% to 10% till 2026, as compared to National Grid’s CAGR of 5-7%.
View from the City
According to TipRanks’ analyst rating consensus, both the stocks, National Grid and SSE, have Moderate Buy ratings.
The average National Grid price target is 1174.29p, with an upside potential of 7.8%. The stock has four Hold and three Buy recommendations.
The average SSE price target is 2055.88p, suggesting growth of 15.5% on the current level. The stock has better analyst coverage and has ratings from nine analysts. It has six Buy and three Hold recommendations.
Also, as per the TipRanks Smart Score Tool, both companies have a score of 9, which means they have good potential to outperform the market.
Conclusion
The utility sector is subject to regulations, which makes the decision to invest more complex. These stocks provide extra cushioning with higher dividends. The long-term dividend for SSE looks more comfortable.
Disclosure
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