Saturday, March 24, 2007

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.

Thursday, March 15, 2007

Who said banks are boring?

Royal Bank of Scotland recently release their 2006 results. They were excellent but one statement in particular stunned me. I quote CEO Sir Fred Goodwin: "Over the last ten years total shareholder return has also averaged 18%." That's right, share price gains plus dividends received had resulted in an average yearly gain of 18% over the last ten years.

Eighteen percent! 18%!

How many funds have averaged 18% growth over the last ten years? I would guess less than 5%. In fact many funds don't last ten years as their historic results start to look so bad they get axed and re-branded.

When I was in the unfortunate position of owning an endowment policy I was told that the fund manager was targeting a measly 6% growth a year. I bet that if the fund was invested in the five largest UK banks the annual growth would easily have exceeded 12%. Just thinking about that endowment policy makes me angry so I will move on!

I am starting to wonder why I bother to invest in risky growth companies like eBay and Google when a staid bank like RBS can offer 18% a year. I know that RBS won't necessarily return 18% over the next ten years but then nor will my portfolio of growth shares necessarily.

I would quite like to divide my growth portfolio evenly between HSBC, RBS, Barclays, Lloyds and HBOS and see how it performs compared to the FTSE100. RBS is currently on a 2007 PE of under 10, but if the EPS is growing at 10% and it is yielding 4% it should return at least 14% a year. So it is cheap and safe.

Now is not a good time to my sell eBay and Google holdings as they are currently at low multiples but going forward I will be looking to switch into safe, boring and exceptional banks!