I’m looking around for some defensive dividend payers this month, I’ve got a decent spread of sectors in my portfolio, but nothing in the energy area. A nice stable utility could be a good addition…
Scottish and Southern Energy (SSE)
SSE has a whopping dividend of over 6% at the moment and has increased dividends for the last 18 years. So a steady performer, but i’m not sure about the reliability of future dividend increases. They have scant dividend cover and gold-plated pensions to worry about…
SSE is shedding customers in its retail division. On the flip side, they are offering other services to their existing customer base and driving efficiency throughout the business. They also have a big gas networks business and a diverse mix of well-managed generation assets. 1403p at the time of writing.
Centrica is another UK energy giant. The shares have been in a gradual decline. From a peak of 400p in 2013 they now stand at 199p.
About a month ago there was a mini spike on rumours of a takeover. Nothing has come of that, although I note that there are no recent director deals. So that means a) the executives don’t see 199 as good value b) they’re prevented from buying due to takeover rules or c) nothing.
With the cheap pound there are probably a few companies considering takeover targets, although the spectre of government intervention may have tempered the appeal.
Generally speaking I don’t see the energy giants as too appealing with the rate at which they’re bleeding market share to the newer entrants.
As a consumer there are probably a hundred supply companies to choose from nowadays. So despite the dividend of 5.9% and the slim prospect of a takeover, I don’t think Centrica are for me at the moment.
Red Electrica – Spain, Chile & Peru (REE)
Before the pound took a beating I was looking at defensive stocks in Europe, I quite like Red Electrica. Red being Spanish for “Network”, it also has assets in South America like so many Spanish companies.
The assets outside of Spain contribute about 8% of revenue and are concentrated in Chile and Peru, two of the most stable economies (for now).
With steadily increasing revenues and a monopoly on the Spanish power network I can see the appeal of this company, although the dividend growth isn’t exactly electrifying (ahem).
Since it’s listed in Euros, from a Brits viewpoint it’s become 20% more expensive over the last year with the pound getting hammered. It’s another big dividend payer – in the region of 6.5% – and it’s a more sustainable dividend.
I can’t see many potential risks, aside from a caliphate being established on the Costa del Sol, which is pretty unlikely. In that event I think we’d have bigger concerns (like where to get a fry-up and sunburn at the same time).
One i’m going to keep on my radar, if by some miracle the pound recovers i’ll consider a purchase.
National Grid (NG.)
Everyman and his dog piled into National Grid after the Brexit vote and the price subsequently rose. The historically excellent dividend yield was eroded a little so it dropped off my hitlist. However, it’s come down from its highs of 1200p and is now at 956p, around it’s historical p/e of 15.
With a dividend around 5% and the potential for a resurgence in price it’s back in my sights.
Greencoat UK Wind (UKW)
I’m not quite sure how to classify this, it’s basically an asset management company focussed on wind turbines. With four dividends a year and a yield of 5.3% this would slot nicely into my portfolio as a regular payer.
They’ve recently enlarged their stake in a Scottish windfarm and earlier in July bought a windfarm in Grimsby; taking their total to 21 windfarms across the UK.
The business is quite simple, they just let the turbines spin and sell the electricity. So long as there’s not too many broken turbines and the winds blowing they’re in business.
If bats had a say in it, there would probably be less turbines. The low pressure wake behind the turbines causes haemorrhaging in bat lungs… but so long as the company steers clear of bat colonies, Batman and Robin won’t be on their case.
Relative to the other businesses above, Greencoat is small with a market capitalisation of 900million. However it’s very focussed and operating in a segment with good prospects – renewables. Its dividend is growing faster than the other companies mentioned above and is number one on my list for that reason. 123p at the time of writing.
Downside – At Risk Of Government Meddling
The government has it’s eyes on the energy industry… Centrica has just announced an 18% increase in consumer energy prices. The boss of SSE has also been awarded a juicy 72% bonus.
These are the kind of numbers that don’t go down too well with the voting public, and government regulation can be a major thorn in the side of utilities.
Upside – Potential Takeovers…
Shell have also just announced they’re moving into the energy supply business. It’s a case of adapt or die as the economy moves away from fossil fuels. No doubt there are a few other Oil and Gas exploration businesses contemplating similar moves.
I think this sector is poised for some merger and acquisition activity. Who that may be remains to be seen…
Since writing this I’ve bought shares in Greencoat. Disclaimer: Perform your own due diligence before buying shares, or prepare to be stung.