Why SSE pays dividends

With energy continuing to be in the spotlight, SSE knows there will be scrutiny of its decision to increase the interim dividend payable to shareholders by 3.2%, just weeks after its Energy Supply business announced that electricity and gas prices would go up by an average of 8.2%.

Those prices are, unfortunately, going up because SSE’s Energy Supply business lost £115.4m in the six months to 30 September and the cost of wholesale energy, distribution and social and environmental levies are all rising.  Despite this, SSE will cap its prices at their new level until at least the Autumn of 2014.

Nevertheless, the frank question that some people will ask is this: why should shareholders get dividends at a time when the prices charged to customers are going up?

At SSE, we know we have huge responsibilities.  We are entrusted – by Acts of Parliament originally – to deliver good service for customers and invest in the right assets to help meet the future energy needs of the country.  In return for doing this, and for taking on the risks associated with it, we are able to pay dividends to the shareholders who invest in us.

SSE’s shareholders range from individuals to charities and financial institutions such as Legal & General and Scottish Widows that provide pensions and other financial and savings products to help people here in the UK provide for their future and that of their families.

Shareholders’ investment takes four forms.

First, shareholders bought electricity and gas companies like SSE from the state in the 1980s and 1990s and dividends are the main way in which they get a return – something back on the money they invested.  Some of those shareholders have since sold their shares, and with them the right to receive any dividends, but the principle stands.

Second, some shareholders have since invested directly in SSE through the share ‘placing’ that took place in 2009 and raised almost £500m for future investment.  This helped to finance for example, the construction of new wind farms to help the UK meet legally-binding EU targets for renewable energy.  As with the original shareholders and their successors, dividends are the main way in which they get a return on their investment.

Third, through what’s called a Scrip dividend scheme, shareholders can choose to forego cash dividend payments and receive new shares instead.  This, too, is investment – since SSE introduced its Scrip dividend scheme in 2010, shareholders have effectively invested over £500m in the company that has been available for the company to spend on things like power generation and distribution.  Nevertheless, these shareholders will want to have the option to receive cash dividends in the future.

Finally, as the owners of the company, shareholders in a company like SSE enable it to borrow money from debt investors.  For a utility like SSE, which maintains and invests in the long-term infrastructure that the country needs, this really matters.

Since 2008, SSE has invested over £8bn in things like modern power stations and new electricity networks.  To fund this, it has borrowed money and its net debt has gone up from £3.7bn in 2008 to £7.8bn now.  Shareholders, as the owners of SSE, have effectively taken on this debt and pay interest to debt investors; and in return for this SSE pays them dividends.

In short, shareholders in SSE have supported and are continuing to support massive investment in the energy infrastructure of the UK, and regular dividends are what they get in return for this investment.  Without it, SSE could not finance the large capital projects that are helping to modernise the UK’s energy system.

There is an alternative, of course.  For 40 years, the electricity and gas industry was nationalised, and SSE accepts that some people believe that energy companies should be state-owned.

It’s a perfectly legitimate view for people to hold, but all of the main political parties believe the companies should be in the private sector.  A key reason is that energy is a long-term, capital-intensive industry that requires a lot of investment if customers are to enjoy the benefit of reliable supplies of energy  – and there seems to be consensus that this investment should come from the private sector.  If the industry were again nationalised, the capital for such investment would have to be provided by the government.

By paying dividends, SSE attracts the investment in energy that is, ultimately, in the best long-term interest of customers.

About the author

Sally Fairbairn Director of Investor Relations and Analysis

Sally is SSE’s Head of Investor Relations and Analysis. She is a qualified chartered accountant, and joined SSE in 1997. She works in SSE’s Finance Department and works with Gregor Alexander and Alistair Phillips-Davies to help the investment community understand SSE’s business, strategy and operations and to help SSE understand the investment community’s requirements and priorities.

Read more articles by Sally Fairbairn