Last week, the FTSE 100 had a rough time, dropping over 1% on Friday. Concerns around the upcoming UK Budget and the state of the economy are weighing on investors’ minds. Despite this, one stock really caught my attention, surging 19% to stand out from the crowd. Here’s what’s going on.
I’m referring to SSE (LSE:SSE). The utility company’s now up 30% in the past year, with over half of those gains coming last week. The main driver for the move was the announcement of a £33bn five-year investment plan, which focused heavily on its regulated electricity networks in the UK.
This is significantly larger than its previous investment target, signalling a shift to a more growth-oriented infrastructure business. The implications down the line are also positive. Larger-scale assets ultimately should provide more stable and predictable cash flows. This is appealing for income investors, who would feel more comfortable with the sustainability of payments.
The move in the share price reflects the optimism from market participants. I think it is also a good sign because, at a time when there are plenty of clouds over how the UK’s performing, SSE’s clearly pushing ahead with a long-term commitment to UK operations.
However, it should be noted that more debt is likely to be taken on to help part-fund the project. With any plan of this magnitude, there’s also execution risk.
At a time when other FTSE 100 stocks are falling, the move last week highlights again why SSE can be seen as a defensive stock. It provides essential services to consumers and businesses via electricity distribution and energy generation. This means demand stays relatively stable, even during uncertain times like now.
Even with people likely cutting back on large purchases due to potential tax hikes looming, paying for electricity is going to be one of the last things to be cut.
A significant part of SSE’s business comes from regulated electricity networks in the UK. This means prices are closely monitored by regulators, with revenue tied to long-term asset bases (like those the business is investing in right now). So the chance of a sudden drop in output’s doubtful.
Of course, being so closely tied to regulatory bodies is a risk. Any changes made could negatively impact SSE, with management lacking the power to influence this.
Finally, SSE might appeal to some due to the dividend. Over the past five years, the yield here has averaged around 4%. Currently, it’s fallen to 2.9%, but this is due to a sharp 19% shard price spike last week. It has paid a consistent dividend for over two decades, so even during tough times, people can count on receiving some income.