With a recent survey suggesting UK plc's generosity with dividends may tail off next year, Jefferies asks a pertinent question about SSE (LON:SSE).
Can the utility hold its dividend policy?
That's the central question in a broker note issued by Jefferies, which has initiated coverage with a 'hold' rating and 1,600p price target, about 40p above the current share price.
The company has weathered recent low power prices and the transition away from the use of fossil fuels better than most of its European peers, Jefferies argues, but it has also seen substantial capital destruction, and has been “investing heavily to largely stand still”.
SSE's capital expenditure has totalled £8.6bn over the past five years but it has also written off 4%-5% of its asset base in each of these years, during which time earnings have stagnated.
With the main reason for investing in the shares being the dividend, Jefferies has stress-tested the dividend policy under two commodity price scenarios.
“First, we mark to market and conclude that the dividend is supportable through 2017/18, although there would be little scope to absorb an additional shock. We then reduce commodity and power prices by 15%, which is the point where the dividend appears untenable,” the broker revealed.
Making a judgement call, Jefferies says the dividend policy is secure and it expects annual growth of at least retail price index inflation over the coming years.
JPMorgan Cazenove has been mulling over yesterday's results from online fashion firm ASOS (LON:ASC), which got a number of investors excited.
Cazenove sees no reason to go overboard and with the shares up 13% over the last month in a sector that has trod water, it reckons there will be a pause for breath in the short term.
It sticks with its 'overweight' rating and price target of 4,000p. The shares currently trade at around 3,000p.
Investec, on the other hand, has abandoned its bearish position on the stock and is now neutral.
Elsewhere in the retail sector home improvement outfit and Argos owner Home Retail (LON:HOME) produced results that were ahead of market expectations, helped by a good performance from Homebase.
On the other hand, Cantor Fitzgerald notes, he company is flagging that it expects benchmark pre-tax profits to be slightly below the bottom end of the range of market expectations of £115mln to £140mln.
The broker thinks the under-performance of the stock has gone far enough, but acknowledges that the shares are likely to be weak this morning.
The broker got that right; the shares tumbled 21.7p to 128p, but Cantor Fitzgerald ascribes a break-up value to the group of 266p per share, so could be one for the patient investor.
Meanwhile, Keith Bowman, an equity analyst at Hargreaves Lansdown Stockbrokers commented: “Tough electrical sales and required investment at Argos have led to a profit warning. A resurgent Dixons has helped impact the first half, whilst likely Black Friday and Christmas promotional activity and investment costs for its new home delivery and store collection offerings are overshadowing the second half.”
“In all, group recovery hopes look to have been dashed again, with current analyst opinion for a strong hold likely to come under clear downward pressure,” Bowman concludes.