LONDON -- SSE doesn't see itself in the "electricity generation" business as much as in the "dividend generation" business.
At least that's the impression you'd get from its website. Most FTSE 100 companies have a section on their websites with a name like "Our Strategy". Few devote it entirely to the merits of dividends, as SSE does: dividends for income, dividends for growth through reinvestment, dividends as a mechanism to enforce discipline in capital allocation, and dividends as a yardstick to hold management to account.
That single-minded focus is reflected in a superlative track record. It claims to be one of just five FTSE 100 companies to have delivered a real dividend increase every year since 1999.
It's expected to increase the next full-year payout by at least 2% more than RPI when it announces its results next month. After that, with the regulatory regime not yet settled, the current target is to increase dividends at least in line with inflation, maintaining dividend cover around 1.5 times.
SSE's business model combines economically regulated transmission and distribution (the networks segment), a much-policed retail segment (which was fined recently for unfair doorstep-selling) and an unregulated wholesale segment that generates electricity. The networks and wholesale businesses make up around 40% each of operating profit, with the retail business chipping in 20%.
Industry regulator Ofgem has started consultations on a new pricing regime for SSE's most significant regulated activity, electricity distribution, to run from March 2015. That injects uncertainty, but SSE has historically been successful in squeezing out incremental profits from operational efficiencies.
The wholesale business offers most scope for the company to make unregulated profit margins. SSE is making a big play on renewable energy. Currently, 25% of its generating capacity comes from renewables, flattered by its hydro assets, and it plans to increase that to 40% by 2025. That's an awful lot of government-subsidized wind farms, but you can't blame the company for exploiting the regime. In March it floated some wind assets in Greencoat , with the government taking a 20% shareholding in a reverse-privatization.
Ian Marchant stands down this Summer after 10 years as CEO. He is being seamlessly replaced by his deputy and it is unlikely to herald significant change, especially not to the company's relentless focus on dividend growth.
SSE is a superb income stock, whether you want income from your portfolio or whether you reinvest dividends to see your portfolio grow by compounding: the phenomenon described by Albert Einstein as the eighth wonder of the world. But the Motley Fool's analysts haven't picked SSE as their top income stock for 2013. That accolade goes to another utility. You can find out which it is, and why, by downloading the report to your inbox. It's free and without obligation -- just click here.
The article SSE: The Dividend Generator originally appeared on Fool.com.
Motley Fool contributor Tony Readingowns shares in SSE but no other shares mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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