SSE lifts dividend 2% but warns cover will fall due to "uncertainties"

LONDON (ShareCast) - Profits and earnings crawled slightly higher at SSE (LSE: SSE.L - news) in the full year as the utility company increased its dividend in line RPI inflation, but it warned dividend cover would fall due to the pressure of "significant uncertainties" on earnings. Revenue rose 3.5% to £31.65bn, with adjusted profit before tax up 0.9% to £1.56bn and adjusted earnings per share lifted 0.6% to 124.1p.

The FTSE 100 group increased the full-year payout 2% to 88.4p per share as management remained committed to unwinding dividend cover to protect the policy of dividend increases that at least keep pace with RPI inflation.

Chief executive Alistair Phillips-Davies said the performance on EPS and PBT was "solid" as the company also invested for the future, through almost £1.5bn of capital and investment spend in the UK and Ireland (Other OTC: IRLD - news) .

Looking ahead to the new financial year, he warned that expected pressures on EPS were "likely to make themselves felt to some extent" but that annual dividend increases at least in line with inflation was the target.

After the company cautioned last year that dividend cover could temporarily fall below the target of 1.5 times and be closer to 1.2x next year, dividend cover has now fallen to 1.4 times.

With EPS likely to remain "subject to significant uncertainties", this will now mean dividend cover could range from around 1.2 times to around 1.4 times over the three years to 2018.

"Nevertheless, and on that basis, SSE believes that a long-term target for dividend cover of a range of around 1.5 times is the right one to aim for." The sector has been boosted by the Conservative party's election win but the looming conclusion of a Competition and Markets Authority (CMA) investigation is one of those issues weighing on sentiment.

The company said the probe presented "a major opportunity to achieve a stable policy and regulatory framework" but traders and analysts are more cautious.

Bank of America Merrill Lynch noted that the yield of 5.3% was a circa-50bps sector premium and should provide support, "but there are no incremental positives here - the generation market recovery required to drive growth will probably remain elusive, and we think uncertainties associated with the CMA investigation and wind subsidies will overshadow."