Renewables company SSE PLC (LSE:SSE) has seen its shares sink to their lowest in two and a half years ahead of a year-end update on Wednesday, though analyst said this may be more to do with the group being seen, like many utilities, as a "bond proxy".
The slide may be more to do with rising bond yields than the fundamental prospects of the FTSE 100-listed business, which looks to be performing as expected, said Dan Coatsworth at AJ Bell, based on first-half results and third-quarter update for this financial year to March 2025.
"Whether the risk in the benchmark risk-free rate, as benchmarked here in the UK by the ten-year gilt yield, is down to concerns over the Budget, the UK’s inflation and growth prospects or a wider bond market revolt over sovereign debt levels in the West (or a combination of all three) is hard to divine."
UK 10-year gilt yields in recent weeks have edged back up towards the 17-year high seen in January.
With the UK base rate now around levels that are closer to 'normal', Coatsworth said the traditional inverse relationship between gilt yields and so-called bond proxies like utilities "seems to be reasserting itself once more".
Many investors hold utility stocks for the income stream they offer through their dividends, as bonds offer income via the coupons paid.
"Given that utilities, in theory, see relatively consistent demand and generate tightly regulated returns, the idea is that the dividends are fairly predictable and dependable, just like the interest payments on a bond, which usually come at a pre-set time, at pre-set intervals over the pre-determined life of the debt instrument," he says.
"This can mean that utilities are valued on the basis of the yield they offer relative to the yield on the risk-free rate.
"If bond yields rise, the dividend yield becomes relatively less attractive, and vice-versa, especially as equities come with more risk than bonds."
SSE cut its dividend for the year to March 2024, the analyst notes, which was to help fund its new strategy, called the 'net zero acceleration plan plus', whereby it plans to invest £20 billion in renewable power projects between 2023 and 2027.
For Wednesday's update, the company has previously given guidance for adjusted earnings per share of between 154p and 163p, compared to 158.5p a year ago.
In the first nine months of fiscal 2025, SSE’s renewables output rose by a quarter to 9.3GW, while gas-fired production rose by a sixth to 12.5GW, meaning renewables represented more than 40% of output.
Another element to bear in mind is that CEO Alistair Phillips-Davies is preparing to step down later this year, once a successor is identified.