Are companies like FTSE 100 giant SSE (LSE: SSE) and smaller player Jersey Electricity (LSE: JEL) now bargain buys or value traps? Here, I’ll give my views on the prospects for these two stocks.

Out of favour

About half of SSE’s five-year share price decline of 26% has happened over the last 12 months. Headwinds have included tougher regulation, competition in retail supply, and rising concern about the Labour Party’s manifesto commitment to renationalise utilities.

It’s perhaps not surprising many SSE investors have headed for the exit. However, at a share price of 1,094p, the company is now lowly valued. It trades on a forward 12-month price-to-earnings (P/E) ratio of 11.4, with a prospective dividend yield of 7.4%.

Attractive for high-income seekers

It was disappointing that SSE’s plan to merge its retail business with Npower’s fell through last year. However, while pickings aren’t as rich as they once were in retail supply, the business is still nicely profitable. Management continues to work on securing its future outside of SSE, my Foolish colleague Roland Head suggesting, “perhaps in combination with a smaller energy retailer with a sharper focus on marketing.”

I think the medium-to-long-term outlook for SSE looks good. The UK has become the first major economy to legislate for net zero emissions by 2050. And SSE is positioned well, with its “strategic focus on regulated electricity networks and renewable energy, and our commitment to creating value through the low carbon transition.”

As to nationalisation risk, there are significant political, legal and practical obstacles. As I’ve discussed previously, there are good reasons for thinking investors would be fairly compensated, if it came to it. As such, I rate SSE a ‘buy’ today, with the dividend yield being particularly attractive for high-income seekers.

Standing the test of time

I think there’s even lower nationalisation risk with Jersey Electricity. Here, 62% of the shares are owned by The States of Jersey (the government of the British Crown Dependency), while the remainder have traded on the London stock market for over 50 years. Westminster retains the right to legislate for British Crown Dependencies against their will, although the Attorney-General of Jersey reckons this right may have become unenforceable by a long habit of non-enforcement (the legal doctrine of ‘desuetude’).

Having said that, there have been calls on the island itself over the years for the States of Jersey to take back full control of Jersey Electricity. However, the structure of the company appears to have stood the test of time, and to work pretty well for all stakeholders, including shareholders.

Risk diversifier

The Jersey Electricity share price hasn’t declined as much as SSE’s over the last 12 months, being down less than 2% (and modestly positive when dividends are included). Over five years, the shares are up 35%, making it a notable sector outperformer.

Despite this performance, the valuation remains reasonable. At a share price of 444p, the forward 12-month P/E is 12.5 and the prospective dividend yield is 3.7%. I rate the stock a ‘buy’ as a nice little risk diversifier in the sector.

The post Is the SSE share price a FTSE 100 bargain or value trap? appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The company in question, which released its latest annual results this morning, is another utility, Jersey Electricity (LSE: JEL). Let’s begin by looking briefly at its record of delivering value for shareholders. The table below shows its annualised total returns over five years and 10 years, alongside those of National Grid and the other big FTSE 100 energy utilities, SSE and Centrica.

As you can see, Jersey Electricity’s shareholders have enjoyed very decent returns. Furthermore, I believe the company is more than capable of continuing to deliver for investors long into the future.

Small-cap gem

In today’s results, for its financial year ended 30 September, the firm reported a 4% increase in group revenue to £105.9m. Its core energy business (importation, generation, transmission and distribution of electricity) was responsible for 78% of the revenue. A further 13% came from its electrical retail store and website, with the remaining 9% coming from several smaller businesses, including building services and property.

Pre-tax profit for the year increased 13% to £15.3m, with earnings per share (EPS) rising 14% to 39.54p. The board lifted the dividend by 5% to 14.9p — covered a very robust 2.65 times by EPS. At a current share price of 457p (unchanged on the day), the price-to-earnings (P/E) ratio is 11.6 and the dividend yield is 3.3%.

The company, which was established in 1924, is 62%-owned by the States of Jersey (the government of this British Crown dependency), while the remaining shares have been traded on the London market since 1964. I view the current valuation as attractive for such a long-established and reliable business, and I rate the stock a ‘buy’.

Heavyweight hero

National Grid will be a more familiar company to most Britons, being known particularly as the system operator of the nation’s high-voltage electricity transmission network. It’s also the system operator of the gas transmission network, as well as having substantial — and growing — energy assets in the US (currently contributing 37% to group operating profit).

The shares have been cheaper than their current 840p at times this year — notably during the spring market sell-off when they fell below 750p — but I continue to rate the stock a ‘buy’ at the current level. This is because this colossus in the regulated utilities space is largely insulated from the wider economy and its dividend yield is still at a highly appealing level.

For the 12 months ended 30 September, EPS of 61.6p gives a P/E of 13.6 and the trailing dividend of 46.52p gives a yield of 5.5%. The dividend is covered 1.32 times by EPS. This is markedly less robust than at Jersey Electricity, but I believe it’s adequate for a heavyweight blue-chip utility.

The post Why I’d buy the National Grid share price and 5.5% dividend right now appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Losing it

The consensus among City analysts is that SSE will deliver earnings per share (EPS) of 89p for its financial year to 31 March 2019, giving a price-to-earnings (P/E) ratio of 12.9 at a current share price of 1,150p. The company recently reiterated the board’s previous guidance that it expects to recommend a dividend of 97.5p for the year, which gives a terrific-looking yield of 8.5%.

However, we should note that the dividend will be uncovered by earnings, and also that it will be rebased to 80p for fiscal 2020, bringing the yield down to 7%. This still represents a superb income. Furthermore, with EPS for the year forecast to rise to 105.3p, the dividend would be well covered and the P/E would drop to 10.9. Such fundamentals would appear to underpin the current share price and, indeed, give it plenty of scope to rise.

Having said that, I’ve become increasingly concerned in recent months by growing competition from smaller rivals, increasing regulatory pressure, the Labour Party’s nationalisation plans (should it get into power), and the additional uncertainty of SSE’s planned merger of its retail business with that of Npower. While I haven’t viewed these as necessarily fatal to the investment case, one of the key factors for SSE’s recent shock profit warning has been the final nail in the coffin to persuade me to view the stock as one to sell.

The exceptional summer I consider a one-off, but the big losing bet made on lower gas prices by the group’s energy trading arm, which came out of the blue, is much more of a concern for the future. It has led me to conclude that SSE no longer possesses the visibility and predictability of earnings and dividends that I demand from an investment in the utilities sector.

Alternative energy

Smaller energy utility Jersey Electricity (LSE: JEL), which is the monopoly supplier of electricity to the island of Jersey, is much closer to my idea of a utility investment with the requisite characteristics. The States of Jersey — the government of the British Crown dependency — owns 62% of the company, while the remainder of the shares have traded on the London stock market since 1964.

The company has consistently balanced ongoing investment in infrastructure with affordable electricity for customers, plus attractive, steady returns for shareholders. The dividend has increased at a compound annual growth rate of around 5% over the last five years. I’m confident this rate of growth can be maintained because, after a phase of heavy infrastructure investment, the dividend is underpinned by steadily increasing profits and reduced capex.

At a share price of 473p, forecasts for Jersey Electricity’s current financial year put it on a P/E of 13.6, with a prospective dividend yield of 3.2%. I view this, as an attractive offering for such a reliable business, and I rate the stock a ‘buy’.

The post How low can the SSE share price go? appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Stumbling giant

In its annual results in February, the FTSE 100 giant posted a 25% decline in adjusted earnings per share (EPS) to 12.6p, only just covering the 12p dividend. Normally, a super-high yield and poor dividend cover would indicate a likely future payout cut, but my Foolish colleague Roland Head argued that Centrica could be an exception.

The bull case, which rests on management meeting its targets for cost savings and limiting capital investment, is certainly worth considering. However, the business continues to lose customers in a competitive environment and I see significant downside risk. Management’s targets appear ambitious to me, particularly with the government’s proposed cap on standard variable tariffs. As such, I don’t see a great margin of safety in the company’s price-to-earnings (P/E) ratio of 11.7.

Furthermore, on the dividend front, the consensus forecast of City analysts has moved to a cut (11.8p), but I find myself in agreement with those at the bearish end of the spectrum. For example, Morgan Stanley models an 8p payout, but also adds, “it could well be lower than this.”

Utilities are supposed to provide investors with steady returns at relatively low risk. Centrica has delivered anything but this over the years and the future looks no more promising to me. However, while I rate this stumbling FTSE 100 giant a ‘sell’, there’s a hidden gem in the utilities sector — a ‘blue-chip small-cap’, I’d call it — that I’d happily buy.

My idea of a utility

Jersey Electricity (LSE: JEL), which released its latest half-year results today, was founded in 1924 and listed on the London Stock Exchange in 1964. The sole supplier of electricity in Jersey in the Channel Islands, the company has the qualities I look for in a utility.

For the six months to 31 March, it posted an 8.7% increase in EPS on 4.3% higher revenue, and the board lifted the interim dividend by 5%. Management described profits as being, “at a level commensurate with a sustainable rate of return typical for a regulated utility and at a quantum needed to maintain our continued investment in infrastructure.”

The company, which is 62% owned by The States of Jersey (the government of the British Crown dependency), has long operated in a stable political environment and has balanced the needs of its stakeholders. This includes steady returns for equity investors, who have seen an average total return of 9.3% a year over the last 10 years, compared with 6.1% for the FTSE 100 and 0.9% for Centrica.

The shares are trading 1p higher at 475p on the back of today’s results. With trailing 12-month EPS of 36.6p, the P/E is a reasonable 13, while a well-covered 14.5p dividend gives a running yield of 3.1%. I see no reason why the company can’t go on delivering consistent returns for its shareholders long into the future.

The post Why I’d buy this hidden gem ahead of this FTSE 100 8% yielder appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Having a near-monopoly of ownership and actual monopoly as operator of Britain’s principal gas and electricity arteries, the FTSE 100 blue chip holds a unique position of national dominance. Needless to say, it’s a highly regulated business, but essentially, if it invests appropriately and operates reliably and efficiently, shareholders should receive a fair and relatively consistent return on their investment.

Attractive opportunity

Even after a period of weak share-price performance, National Grid’s 10-year annualised total return of 5.71% is a little ahead of the Footsie’s 5.57%. Furthermore, the current depressed price (870p) to me represents a great opportunity to buy a slice of the business.

The company is expected to deliver earnings per share (EPS) of 58.9p this year, giving a price-to-earnings (P/E) ratio of 14.8. You have to go back around five years to find it on such an attractive earnings rating and the same can be said of a 5.2% dividend yield on an expected payout of 45.5p.

Diversification

Operating in the northeast US as well as Britain, National Grid offers a degree of diversification in that it isn’t exposed to a single regulatory regime. However, I imagine few investors are aware that there’s another London-listed company, offering diversification into a third geography and regulatory regime.

The company in question is long established, having been founded in 1924, and joined the stock market in 1964. It operates in a mature western market, where the risks of political upheaval, seizure of assets and so on are minimal, and it’s a well-managed business. It released its latest set of annual results today.

Hidden gem

Jersey Electricity (LSE: JEL) is the sole supplier of electricity in Jersey, in the Channel Islands, and also has some small income streams from non-energy businesses. Its shares are 62% owned by The States of Jersey (the government of the British Crown dependency) with the remainder in the hands of institutions and private individuals.

The company today reported a pre-tax profit of £13.5m on revenue of £102.3m for its financial year ended 30 September. EPS came in at 34.6p, which was 3.9% up on last year, and the board lifted the dividend by 5.3% to 13.8p. The shares are unmoved at 452.5p, giving a P/E of 13.1 and a dividend yield of 3%.

Jersey Electricity’s 10-year annualised total return is running at 9.39% (ahead of National Grid’s 5.71%) and I believe the Channel Islands business is well positioned to continue delivering very satisfactory returns for its shareholders.

This well-managed business has a robust balance sheet and with it also having an attractive P/E and well-covered dividend, I personally rate the stock as a ‘buy’ in its own right and commend it as worthy of investigation for investors in ‘safety stocks’ looking to diversify exposure across different regulatory regimes.

The post Why I’d buy this small-cap safety stock alongside National Grid plc appeared first on The Twelfth Magpie.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

National Grid

National Grid runs Britain’s essential gas and electricity networks. Regulators set the company’s investment, pricing and returns parameters for long periods ahead. This gives management good visibility on the future, enabling long-term planning, and making for a very stable business. The company also has some geographical diversification, with energy businesses in the northeastern US.

As a lower-risk equity investment, National Grid is ideal for a core blue-chip holding in a shares portfolio. What’s more, now could be a good time to buy, because the shares are trading not far off their 52-week low and some 14% below their high.

Analyst forecasts put National Grid on a 12-month forward price-to-earnings (P/E) ratio of 14.1, with a prospective dividend yield of 5.3%. The P/E is in line with the FTSE 100 long-term average, which is a generous rating for a stable, premium business. The yield is also generous, particularly as it comes with a boardroom policy to increase the dividend each year at least in line with RPI inflation for the foreseeable future.

Jersey Electricity

Jersey Electricity was founded in 1924 and floated on the London stock market in 1964. The company is the sole supplier of electricity in Jersey, via interconnectors from France and some on-island generation. The company also runs the Channel Islands Electricity Grid in partnership with Guernsey Electricity.

Jersey Electricity is 62%-owned by the States of Jersey (the government), but the company is largely left to get on with the business of balancing the needs of the island and shareholders. Shareholders have seen an annualised total return (capital and dividends) of 10.1% over the past 10 years, which is ahead of National Grid’s 9.5%.

Although a smaller company than National Grid, Jersey Electricity nevertheless enjoys a low-risk monopoly position in its territory. The shares are currently trading at an all-time high, giving a forward P/E of 16.2 and a yield of 3%. While long-term investors could still see a decent return from current levels, I would be tempted to wait/hope for a dip in the price to add some useful satellite geographical diversification to a core National Grid shareholding.

OPG Power Ventures

OPG Power Ventures joined London’s junior AIM market in 2008. The company was founded to develop and operate power plants in India, after a 2003 liberalising act of parliament opened up the industry to private investment for the first time since 1948.

OPG has delivered compound annual earnings growth of over 40% over the last three years, and analysts have pencilled in more of the same for the next two years. More importantly, after heavy investment, OPG has now built sufficient scale to start generating cash flows (and dividends), which means the company is a less risky investment than in the early days — although this rupee-earner is by no means low risk.

Nevertheless, a small investment in the company would add geographical diversification and a bit of spicy growth potential to the power sector of an investor’s portfolio. A current-year forecast P/E of 14.8 falls to 10.3 next year, giving very attractive price-to-earnings growth (PEG) readouts of 0.3 and 0.2. Dividends could also grow fast from a symbolic maiden payout expected this year.

The post Power Up Your Portfolio With National Grid plc, OPG Power Ventures Plc And Jersey Electricity PLC appeared first on The Twelfth Magpie.

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G A Chester has no position in any shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.