Utilities rally as Ofgem review proves no worse than feared

Utilities rally as Ofgem review proves no worse than feared

“Centrica, SSE and United Utilities are all rallying this morning, even as the FTSE 100 languishes back at four-month lows, because the findings of the Ofgem report are no worse than expected and their shares’ dismal performance over the last 12 months reflected the chance of a harsher outcome,” says Russ Mould, AJ Bell investment director

“The regulator’s proposed price cap of £1,136 a year for a typical dual-fuel customer paying by direct debit compares to the analysts’ consensus forecast of around £1,130 and sits in the middle of the forecast range of £1,100 to £1,160.

“Ofgem has therefore shown its teeth but perhaps not bitten quite as hard as it could have. Its report now means that the utilities – and investors – know exactly where they stand and, as the biggest two suppliers in the retail UK electricity market, Centrica and SSE may be particularly relieved.

Source: Ofgem. https://www.ofgem.gov.uk/data-portal/electricity-supply-market-shares-company-domestic-gb

“Centrica has already priced in a third dividend cut in six years, with some analysts pencilling in a reduction from 12p a share to 10p, even if the company’s boss, Iain Conn, continues to state his determination to maintain the pay-out. 

“If he succeeds, that would leave the stock offering a dividend yield of some 8%. While some investors may view that as ‘too good to be true territory’ – and a reflection of the fear that the share price could buckle again if UK customers switch suppliers in large numbers or the US operations disappoint again – others may view this as a tempting option, especially at a time when interest rates remain so low.

“And even a cut in the dividend to 10p would leave Centrica’s prospective dividend yield at 6.7%.

Source: Digital Look, consensus analysts’ forecasts

“Investors may also now take a closer look at SSE, especially as the company intends to spin-off its retail energy supply business, SSE Energy Services, in early 2019, and then merge that unit with Innogy’s nPower operation. 

“Current SSE shareholders will broadly own two-thirds of the new company (and Innogy’s investors roughly one-third) while they would also have a stake in the new SSE plc, which is the regulated rump of the current company that generates, distributes and stores energy. 

“SSE plc is likely to also come with an attractive dividend payment and the sort of yield that could catch the eye of income investors, all pending approval from the Competition and Markets Authority for the Innogy deal, which has a deadline of 22 October.

“United Utilities is also up this morning and so is water supplier Severn Trent, which may simply be benefitting from relief that one regulatory body has not proved to be quite as tough as investors had feared, even if some electricity customers will still get to see savings of £75 a year or more on their bills.”