Questor share tip: SSE protects 6pc dividends

This should reduce the net debt levels at the company that are forecast to hit £7.8bn by the year ended March 2014. The company paid out about £500m in cash for dividends in 2013 and the plans provide breathing room of about two years of payments.

Job cuts will deliver additional savings. SSE will cut about 500 roles alongside other efficiency savings that should reduce annual costs by £100m.

These measures have given the company room to sustain dividend payments. The company has said it will deliver a 3pc increase in the dividend to 87.7p, a yield of 5.8pc, for the year ended March 2014. The company has pledged to increase the dividend by “at least retail price inflation” for the subsequent two years.

In a statement SSE said that given the risks to earnings per share during the next three years the company was comfortable with dividend cover falling from the target range of 1.5 times to as low as 1.2 times. Consensus estimates are for pre-tax profits of £1.54bn, giving earnings per share of 122p for the year ended March 2015.

Peter Atherton, analyst at Liberum, said the company was “battening down the hatches” adding that: “in our view, it is a well designed package that should reassure investors that the company is proactively addressing its challenges and crucially shoring up its balance sheet to protect its all important dividend policy.”

The plans were well received by shareholders sending the shares almost 2pc higher in morning trade. SSE shares have risen by 11.5pc so far this year, compared the wider FTSE 100 down by 1.4pc. However, the shares are still below the £15.80 level last October when Labour leader Ed Milliband proposed a prize freeze.

SSE shares have had a strong start to the year, and now trade on an adjusted forecast earnings ratio 12.6 times, falling to 12.3 times next year. The most attractive element is the forecast dividend yield of 6pc, and management have said the dividend growth will beat inflation for the foreseeable future. The company has taken measures to reduce political risk, however, shareholders remain exposed to a fall in the share price if earnings fall. On balance the rating looks reasonable for now, hold for income.

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