Utilities have come under pressure this year following commitments from both major UK political parties to cap energy prices, but power generator SSE is an attractive stock, according to Iain Wells, manager of the Kames Capital UK equity income fund.
Wells said that while utilities are being buffeted by political and regulatory headwinds, he recently added to SSE following a slide in the share price since the turn of the year.
“The utilities sector enjoyed a period of declining interest rates during which companies issued debt at ever cheaper levels, and their pricing was better than expected,” he said. “But now they are struggling as rates rise and as the regulatory cycle gets underway. However, SSE’s situation is different. The price is already broadly discounting some of this uncertainty, and the dividend – which is currently forecast at 6.3% – is very attractive.”
While Wells and co-manager Douglas Scott have added to SSE, Wells said the remainder of the sector still looks challenged, in particular the UK’s water companies.
Across the equity market valuations remain generally attractive given the dividends paid by many UK companies, Wells said. But any correction for some of the smaller companies in the UK could lead to a wave of mergers and acquisitions.
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