Power for pensioners

After recently discovering the sort of total shareholder returns you can get from high yielding stocks I thought I would look at a few utility / power generation companies.

First up was Scottish & Southern Energy. SSE generate and distribute electricity in the UK and also have about 7.5 million gas customers. The market cap. is £13 billion, the 2007 PE is 15 and the yield is about 3%. The projected growth rate in 2008 is 6%.

Chairman Sir Robert Smith said: "The outlook for sustained real growth in the dividend is very good indeed."

SSE's EPS increased an impressive 37% in the last half year, largely because they added 1 million energy supply customers. However there is a very limited pool of energy supply customers in the UK so this sort of growth cannot continue for long.

As you would expect SSE is involved in the development of gas turbines, hydro-electric dams and wind farms to increases it power generating capacity.

The long term target of SSE seems to be to increase its dividend by 4% more than inflation each year.

I then looked at United Utilities (UU.) UU supplies water and electricity and treats waste water in the North West of England. The market cap. is £6.5 billion, the 2007 PE is 14 and the yield is 6%. Earnings growth in 2008 is projected to be 7%.

CEO Philip Green said: "The group has again delivered strong profit growth."

Although underlying operating profit was up 7% in the last half year the dividend was only increased 2.4% in keeping with their policy of increasing their dividend at the rate of inflation.

I did not spend much time looking at UU as they were obviously a very defensive investment. Operating in a heavily regulated environment there is little scope for rapid earnings growth and the only plus points are the high yield and the defensive nature of the revenues. UU may be right for pensioners who are living off the dividends but not for someone like me hoping for a greater return and willing to stomach the risk.

SSE was a bit more interesting but there are only so many households to fight over for gas supply and surely at some point they will lose customers rather than gain them? Also their stated goal of increasing dividends at a rate 4% above inflation is frankly rather conservative for me.

So banks are great but utilities are a step too far down the defensive road.