Wednesday 23 July 2014

THOUGHTS: The Temptations of SSEs Ex-Dividend Day Drop

I like SSE as a company. I have pretty much spent my entire life living within its chief catchment area and have had little cause to complain. It services are reliable. Though as with anyone, I would have preferred their prices to be more reasonable.

What is more, since placing it to my portfolio as one of my first additions in January it has gained over 10%. This is chiefly thanks to my timing being very fortunate being at the virtual peak of the selling spree which followed the attacks on SSE and others by the Labour Party.

Of course, the capital gain was not as interesting to me as its dividends; these seem almost as reliable as its services. Excellent!

Indeed, today was the ex-dividend day for the juicy 60.7p per share final dividend. This was a welcomed contribution and will see me add a further SSE share to my portfolio through its reinvestment as well as a tidy cash return as well.

Ex-dividend day drop

Nonetheless, with the continued uncertainty, many investors appears to have simply held onto the shares until the final ex-dividend date was reached as this morning saw a 5% drop in the share price to around 1469p.

Investors tendency to do this with high-yielding yet uncertain stocks is certainly not surprising. Indeed, the reason why I missed the interim 26p dividend was due to my waiting for exactly the same reaction to see the price drop further.

Happily this meant I could jump on board when the company was trading at a forward P/E ratio of about 11. Shockingly cheap considering.

The sharp drop this morning saw it plummet to a P/E of about 12.5 for the next couple of years. Again, very cheap considering they have confirmed to match their dividend growth to RPI inflation or more for the next year at least.

Resisting the temptation...for now

I thus nearly jumped on it again today. Part of this may have been due to the fact that I was tempted to top up yesterday in order to bolster my holding pre-dividend and put it in position to also pick up a share through dividend reinvestment when the next interim dividend comes round.

Also, it fits in with some of my investment goals for the year. SSEs very low beta--less than 0.3 as I write--would bring down my portfolio beta nicely. Similarly, the dividend yield would pull my portfolio yield a little higher.

Why didn't I? Quite simply because I think there may be further political pressure on the Big Six energy companies in the near future. I expect this to pull a similar trick on the share price as that in January which I was able to take advantage of.

Diluted dividend still looks valuable

The dividend is definitely under pressure with predictions suggesting cover dropping from about 1.3 times to 1.25 times over the next couple of years.

However, currently my holding purchased at 1324p is yielding 6.5% on cost. So for me, even if the dividend dropped about 20p (i.e. to about 66p per share) I would still be very content with the investment as it would still be providing about a 5% yield on cost. However, if that did occur it would provide dividend cover of nearly 1.8 times according to consensus earnings per share estimates.

Of course, I may be wrong about the price drop. But if it does drop to around 1300p to 1400p anytime soon I would happily top up my holding for all the reasons above.

What do you think?

Were any of your SSE sellers this morning? Are you looking to jump back on board when the price presumably dips under pressure again or are you out for the long term? Anyone else looking to top up or open a holding in SSE? Why odes it appeal to you?

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