Sector spotlight: electricity

In this week’s sector spotlight, I take a look at the electricity sector; it’s small with just a handful of players. Still, it offers high dividends but how sustainable are they?

Article updated: 29 July 2020 11:00am Author: Michael Baxter

As a general rule, companies operating in mature industries are good dividend payers and make excellent defensive stocks — meaning they often represent a safe refuge for investors in times of crisis.

The electricity sector, at least the companies in this sector that are listed on the London Stock Exchange, are not fully representative of the UK electricity industry.

There is another point, electricity generation is an old industry, but it is going through a period of rapid change. Climate change is forcing companies to change how they generate electricity, and renewable energies are creating new opportunities.

Take Drax, not so long ago it was known for its massive coal generation plant; today, renewable energies are a key part of its product base.

Yet, the move away from traditional forms of electricity generation has created apparent discrepancies in its balance sheet versus market valuation.

I only focus on companies valued at over £50 million in the sector spotlights; the electricity sector only has three such companies.

That is not to say that companies with a market cap of less than £50million are not worth considering, but investing in very small caps is a specialist area. As a general rule, it is only for investors with detailed knowledge of the companies in question.

So let’s take a look at the three companies in the electricity sector valued at over £50m.

Let’s take a look:

Drax

First listed: 2005

Description: Operates an integrated value chain across three principal areas of activity: sustainable wood pellet production; flexible, low carbon and renewable energy generation; and energy sales and services to business customers. There has been talk of a possible bid for the company.

Drax has been spending heavily on converting its coal plants into biomass, which has been net profits. Its dividends seem tempting, and its balance sheet seems strong enough for the dividends to be sustainable.

Share price 275.4p
2020 high 312p
2020 low 126p
5 year high (2018) 425p
All-time high (2006) 918p
Change in share price last 12 months -9%
Change in share price last 5 years 8%
Change in share spruce all-time -44%
Marketcap£m 1,093
Yield 5.77
P/E 2,754
Revenue growth since 2015 53.8%
Pre-tax profits growth -147.5%
Totalassets/total liabilities £m 1.6
Current assets/total liabilities £m 0.56
Current assets/current liabilities £m 1.28
net assets £1715m

Jersey Electricity A 

First listing 1988

Description: Is a vertically integrated power utility dealing in the importation, generation, transmission and distribution of electricity? The sole supplier of electricity, Building Services, IT, Environmental Engineering and Property on Jersey. 

Jersey Electricity A has a reasonable dividend yield supported by a strong balance sheet.

Share price 470p
2020 high 482p
2020 low 413p
5 year high (2018) 507p
All-time high (2006) 590p
Change in share price last 12 months 6%
Change in share price last 5 years 2%
Change in share spruce all-time -76%
Marketcap£m 144
Yield 3.34
P/E 12
Revenue growth since 2015 10.0%
Pre-tax profits growth 15.4%
Totalassets/total liabilities £m 2.99
Current assets/total liabilities £m 0.49
Current assets/current liabilities £m 2.45
net assets £199m

SSE 

First listing 1996

Description: An energy generator and reseller of electricity and gas. It changed its name from Scottish and Southern in 2011.

The Share Centre currently lists SSE as a hold. It has been investing heavily into renewables, the yield is good, but there are concerns about how sustainable this is, given the balance sheet, which sees current liabilities exceed current assets—a possible bid target.

Share price 1327p
2020 high 482p
2020 low 413p
5 year high (2018) 507p
All-time high (2006) 590p
Change in share price last 12 months 199%
Change in share price last 5 years 187%
Change in share spruce all-time -33%
Marketcap£m 13,809
Yield 6.02
P/E -233
Revenue growth since 2015 -76.6%
Pre-tax profits growth -66.9%
Totalassets/total liabilities £m 1.3
Current assets/total liabilities £m 0.2
Current assets/current liabilities £m 0.7
net assets £199.0m

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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