Dividend investors in big six UK energy supplier SSE (SSE) are months of further uncertainty with its proposed merger with Npower facing a full competition probe.
The UK's competition watchdog says it will launch a full investigation into a tie-up after warning that the deal could raise prices for some customers. The watchdog threatened a full scale probe on 26 April if the two groups failed to offer measures that could satisfy its concerns, and so it has come to pass.
The deadline for the final report is 22 October.
PAYOUT PROSPECTS IN THE SPOTLIGHT
Dividend income is particularly attractive from utility stocks because of the reliable cash flows from these regulated businesses. SSE has increased its dividend payment every year since 2001. It aims to lift the payout each year by at least the retail price index measure of inflation.
That commitment and the size of the SSE dividend has been called into question by the proposed Npower merger, a complex agreement that would involve splitting out SSE’s household energy division from the bit of the company that supplies businesses plus other assets.
This is reflected in a current forecast dividend yield of 7%, based on a consensus 97.6p per share payout this year to 31 March 2019. That’s based on today’s flat £13.955 share price.
Sector yields typically run somewhere between 4.5% and 5.5%.
COMBINED SYNERGY SAVINGS
Cutting combined operating costs and overlap is the main reason why the pair want to merge. SSE estimates ‘greater than £100m’ of cost synergies, according to analysts, although some investment number crunchers think these savings could be much bigger.
There could also be the potential for improving operating margins at the combined energy business, presumably from streamlined operations and modest price increases. Investment bank Berenberg calculates that this could add another £74m to any savings.
But as Shares spelled out back in November, the UK competition watchdog will need significant assurances that consumers will not end up paying higher bills down the line.
SSE is the second largest of the big six by customer numbers, with Npower currently the smallest of the big six with around 4.7m customers. Combined the joint company would have close to 11.5m customers, putting it on a par with market leader British Gas, owned by Centrica (CNA).
