Southern Company (SO) hikes dividend by 4% & remains a low risk utility investment

Southern’s (NYSE:SO) dividend was increased by 4%.  Its overall yield is 4.69%.

The Southern Company operates in the generation, transmission, and distribution of electricity. The utility giant has 44,000 megawatts of generating capacity and over 1,500 billion cubic feet of natural gas consumption. It serves 9 million electric and gas utility customers a year.  The company was founded in 1945 and is based in Atlanta, Georgia.

Southern has maintained a three-year growth rate of dividends of 3.4 percent. Southern currently ranks 2nd in dividend yield within the large cap electric utilities category. The quarterly dividend for the June payment will be $0.58 versus the prior year rate of $0.56 per share. Southern is a member of our Top 100 Dividend Stocks.  (see below).

top-100

The dividend will be paid at the new higher rate on June 6, 2017, to shareholders of record at close of business on May 15, 2017. Southern Co. is currently priced at $49.51. Listed in the table below are the quarterly dividend payments since 2010.

Date Quarterly Dividend
5/15/2017 0.58
2/16/2017 0.56
11/17/2016 0.56
8/11/2016 0.56
5/12/2016 0.56
2/11/2016 0.543
11/12/2015 0.543
8/13/2015 0.543
5/14/2015 0.543
2/12/2015 0.525
10/30/2014 0.525
7/31/2014 0.525
5/1/2014 0.525
1/30/2014 0.507
10/31/2013 0.507
8/1/2013 0.507
5/2/2013 0.507
1/31/2013 0.49
11/1/2012 0.49
8/2/2012 0.49
5/3/2012 0.49
2/2/2012 0.473
11/3/2011 0.473
7/28/2011 0.473
4/28/2011 0.473
2/3/2011 0.455
10/28/2010 0.455
7/29/2010 0.455
4/29/2010 0.455
1/28/2010 0.438

Analysis of Southern is based upon our five key quantative criteria for the Top 100 list, which include;

Category Value Score
Dividend Yield 4.69% 61
Dividend Growth (3-7 year avg) 3.5% 456
Forward P/E 16.75 200
S&P Financial Rating A- 17
Beta 0.55 8
Total Score 742
% Yield 3 Year Div. Growth Rate 7 Year Div. Growth Rate SPS 2017 P/S Ratio 10 yr P/S Low 10 yr P/S High 5 yr low Yield % 5 yr max Yield %
4.69% 3.4 3.6 21.75 2.20 1.68 2.65 3.97% 5.05%

Positives;

  • Southern maintains an investment grade rating of A-.
  • Southern’s current dividend yield (4.69%) is above its five-year average historical dividend yield.
  • Southern maintains a beta of 0.55, lower than the average company.
  • Southern’s dividend yield is above that of the S&P 500 Index.
  • Southern has paid out a dividend consecutively for the past 38 years.

Negatives;

  • Southern is trading slightly above its ten-year average price/sales (P/S) ratio.

Latest Earnings & Overall Analysis:

Southern issued its earnings data on May 3rd. The company reported $0.66 EPS for the quarter, topping the consensus estimate by 6 cents.  Q1 2017 earnings came in at $658 million in contrast with the $489 million in the first quarter of last year. Q1 results were negatively affected by an after-tax charges of $67 million related to increased costs at the utility company’s Mississippi Power’s Kemper County integrated gasification cycle project due to continue delays.  However, the firm expects that by the end of the month the firm will be back to full capacity.  Results were also impacted by the $20 million after tax cost associated with the Gulf Power rate case settlement in the State of Florida.

The utility giant projected Q2 earnings to come in at $0.70 per share, six cents below most analyst estimates.  However, Q2 earnings if met would be two cents above last year’s Q2 results. The Board of Directors was confident enough in the overall business climate to approve an $0.08 increase in our common dividend to an annualized rate of $2.32 per share. Southern has been paying and increasing dividends since 1948.   The firm is making a major transition, as with most other utility firms. Southern Company anticipates that the move away from coal will continue and within a decade nearly 75 percent of electricity generated will come from other sources like natural gas and solar.  Presently, natural gas accounts for nearly half of generation while coal is under one-third.

Its acquisition of AGL Resources last year helped the firm move in that direction.  In fact, with the combination, Southern Company Gas Division is now one the largest distributors of natural gas in the U.S.  Its long-term contracting gives the utility firm a very stable base of revenue as well.  Southern Company maintains some of the least expensive utility rates in the U.S. Its customers are very loyal and its Southeast location makes future growth prospects better than other major utilities in slower growth regions.

2016 2015 2014 2013 2012
Earnings per Share 2.7 2.84 2.77 2.7 2.67
Annual Dividend 2.22 2.15 2.08 2.01 1.94
Payout Ratio 82.22% 75.70% 75.09% 74.44% 72.66%

Overall, Southern Company is a very solid investment for dividend investors looking for exposure to the utility industry.  Priced at $49.77, it trades for 16.75 my estimate for 2017 earnings. Although its payout ratio is high at nearly 78 percent, it is consistent with many other utility firms. Southern Company is at the mature phase in its cycle, with very modest dividend growth.  Its risk profile, as measured by beta, is 0.55 which is well below the market. It also maintains a strong balance sheet and impressive credit rating. Its 4.69 percent yield is extremely attractive in a world of very low-interest rates. The current yield is well above the sub 4 percent range the stock offered in early 2015.

Earnings per Share 2017 (projected) $2.97
Dividend $2.30
Payout Ratio 77.97%

Based on the firm’s outstanding financial credit rating, elevated dividend yield and low beta, Southern Co. qualifies as one of our Top 100 Dividend Stocks

Southern Co. Dividend Yield Chart (Click to enlarge)

Chart Explanation:  Dividend growth stocks may be viewed undervalued when the current yield is above historical readings for the past 5 years. 

One thought on “Southern Company (SO) hikes dividend by 4% & remains a low risk utility investment

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