SSE Plc (LSE:SSE) shares have proven to be a popular refuge from the volatility in the stock market this year. The stock price closed at 1,649p at the end of 2021, delivering a 9.3% gain for shareholders.
Since then, there has been some mild volatility. But overall, the market capitalisation has only dropped by around 6% in the last 12 months. Compared to the 8% decline seen in the FTSE 100, it seems the energy company is currently outperforming the market.
Can it continue this trend moving forward? And if so, should I be considering this business for my portfolio today?
What does SSE do?
With more than 40 years under its belt, SSE supplies energy to over seven million customers. That makes it the third-largest supplier of electricity and gas in the United Kingdom.
With a multi-decade history of operating within the energy sector, SSE has quite the size advantage over its smaller competitors. Its portfolio of energy assets, including electricity networks, renewables, generation, and storage, grants a high level of consistency within its top-line earnings.
The company was formerly known as Scottish & Southern Energy Plc. But in September 2011, the group changed its name to the much shorter SSE.
The group has been actively responding to the European Energy crisis. Sky-high energy prices have put tremendous pressure on households. Yet since the demand for electricity hasn’t faltered, the company’s bottom line has unsurprisingly exploded, even with the regulatory energy price cap.
Government intervention, such as a windfall tax, does pose a potential threat to SSE shares. But management has announced that the proceeds are being reinvested directly into British energy infrastructure such as renewables and battery storage.
Apart from granting extra capacity to generate revenue in the future, the reduced dependence on external partners will also reduce the severity of the existing and future energy crises.
That certainly sounds morally encouraging investment opportunity. But does the firm have the financials to back this strategy?
The shift towards renewables does make the revenue stream more susceptible to unpredictable weather patterns. However, ramped-up investments in battery storage technologies should not only keep the lights on, but the cash flow moving in SSE’s direction.
Looking at its 2023 first quarter trading update for the three months leading up to 21 July, performance has beaten management’s expectations. And just last month, management provided an update on operations, reaffirming its full-year earnings guidance of 120p per share.
What’s more, the group expects earnings-per-share (EPS) for the first six months of its 2023 fiscal year to be at least 40p. Yet investors weren’t too thrilled by this announcement, with SSE shares taking a small hit. After all, this is slightly below the 42p delivered a year prior.
But with most of the earnings generated during the winter when households turn on the heating, it’s possible that even if the coming results fall short, the second half of the year could deliver superior performance.
Something else that may have stirred trouble is the net debt balance which is predicted to be around £10bn. Yet, personally, since most of the group’s loan obligations are on fixed rate terms. In other words, rising interest rates shouldn’t have much of an impact on profit margins.
It’s also worth mentioning that the electricity company continues to deliver growth through its fully-funded £12.5bn Net Zero Acceleration Programme. Moreover, the firm plans include a growth-enabling, rebased dividend from 2023/24 onwards. Providing this is successful, SSE shares could become a popular stock pick for many income investors in the future.
Should I buy SSE shares?
After studying the future prospects of this business, I’m cautiously optimistic about the future performance of the SSE share price. And it appears I’m not the only one.
Looking at broker forecasts, the stock has an average 12-month price target of 1,910p, with 12 out of 20 analysts placing a “buy” recommendation on the SSE shares. Of course, there are still some analysts unsure about the state of the energy sector, with seven issuing “hold” recommendations and one “sell”.
Considering the business is trading at a seemingly cheap price-to-earnings PE ratio of 6, I’m not surprised by this bullish sentiment. And while there are some noteworthy threats for SSE to contend with, I believe the long-term rewards warrant this level of risk. That’s why, if I had £1,000 today, I’d consider SSE shares for my portfolio.
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Saima Naveed does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and, therefore, may differ from the opinions of analysts in The Money Cog Premium services.