The Investment Column: SSE offers quality plus the hope of a rising dividend

Land Securities is a hold, despite fears of a property bubble; Return to growth makes Didata a buy
Click to follow
The Independent Online

Scottish & Southern Energy is the country's No 3 supplier of energy, with 5.6 million homes and businesses getting their gas from the company and 3.4 million taking electricity. Scottish Hydro Electric, Swalec and Southern Electric are the brands customers will know.

The group also owns the electricity transmission network in Scotland and local networks of gas pipes. All are businesses that are highly regulated, so highly predictable and modestly profitable. SSE's shares will rise and fall with the long-term growth prospects for its dividend payout.

The one big variable for SSE as a group is the wholesale price of the gas and electricity that it supplies. This has been rising, eating into the profitability of the supply business to such an extent that SSE is about to raise prices for its customers by up to 12 per cent.

Happily, SSE also generates about 10 per cent of the UK's electricity, and has actually been doing very well out of the higher prices. It doesn't split out the profits from generation, but as a whole the "generation and supply" business grew operating profit by 42 per cent in the six months to 30 September. Some of that will be the result of adding 400,000 supply customers, but not most of it.

SSE's management is highly regarded and its shares highly prized because of the diversity of the types of generating plants it has and the investment it is putting in to environmentally friendly generating capacity, including wind farms. Yesterday, the company said it would spend £225m to reduce emissions at its coal-fired plants, which will give it an advantage as legislation on greenhouse gases gets tougher.

There was silence yesterday on SSE's long-harboured ambition to merge with ScottishPower, which has got a bid from E.ON. If that deal falls through, and it could if E.ON doesn't agree to pay a full price, then SSE might get its chance. SSE investors have little to fear either way as long as they can take a long-term perspective on the cost savings that could be achieved.

You can't get around the fact that SSE shares are expensive, with a relatively modest 4.5 per cent dividend yield. But that payout should rise by more than 8 per cent a year from here, and investors will be buying into a long-term winner.

Land Securities is a hold, despite fears of a property bubble

Land Securities owns £2.3bn of retail property, from high street stores to out-of-town shopping parks, yet it is able to make the remarkable boast that having its tenants go bust was actually good for business.

A small number of its retail tenants have gone under - furniture chains, in the main - since the consumer downturn began, but replacement tenants have been found quickly and have agreed to pay higher rents.

That state of affairs won't last if there is a full-on consumer spending slump, but it explains why yesterday's interims showed a 7.4 per cent rise in the value of the LandSecs retail portfolio. The company also owns £2.6bn of London offices, up 6.7 per cent in value even without a rebound in rents in the City. That is still expected next year, and should pick up any slack from the retail side of the group. LandSecs has an enviable track record in adding value from big property developments, and will be releasing new City office space in 2007, just at the right time.

Bears of this stock will worry about a commercial property bubble, because bank lending to property investors has allowed them to bid prices higher. This looks unlikely to unwind, however, unless the cost of borrowing increases substantially - something that is not being predicted.

LandSecs shares have further upside potential from its property management business Trillium, and a possible conversion to a "real estate investment trust" structure. Hold.

Return to growth makes Didata a buy

Dimension Data, the South African computer services group which floated at the height of the era, might now be about to pay its first dividend. That at least was the hint in yesterday's final results, which showed a return to sales and earnings growth.

The shares went down a nudge on disappointment that margins were lower, but this reflects a faster increase in product sales than the rise in more lucrative services business. Don't get hung up on that number when more important ones (such as operating profit and cashflows) are headed the right way.

Didata's services business advises corporate customers on how to integrate all their various network software, making communication within the organisation and with outside suppliers and customers that much more efficient.

There is also strong growth from other "solutions" consulting business, in particular from showing companies how to switch their telephone systems from fixed-line calls, which cost money, to voice-over-broadband calls, which are included in internet costs.

With business confidence healthy, and with an in-house takeover of the underperforming Continental European operations by the UK division's management, all looks set fair. Buy.