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The Southern Company (SO) today reported strong 4Q'12 financial performance; beating the EPS estimate by 4 cents. SO was successful in expanding its margins for 4Q'12 as shown in table 1 below. Also, the company offers a high dividend of 4.4%, has a high ROE of 12% and attractive expected growth rate of 5% per annum for the next five years. Therefore, I reaffirm my buy rating on the stock.

SO has approximately 4.4 million customers and is the leading utility company of the U.S. It owns electricity generational capacity of 43,000 MW. Two of the largest subsidiaries of SO's are Georgia and Alabama Power, which contributes nearly 80% to total earnings for the company. SO has delivered strong financial performance in the past years. It was able to grow its top and bottom lines by 4.2% and 3.9% respectively in the last five years.

Financial Results

SO reported quarterly revenues of $3.70 billion, up 0.2% YoY. Also, it was able to beat the EPS consensus by 4 cents, registering 4Q'12 EPS of 44 cents, as compared to 30 cents in 4Q'11. Recent quarter earnings were positively affected by reduced non fuel O&M expenses, which were down 11% YoY. Other than increasing its bottom line for the quarter, SO was able to increase its total KWH's (Kilowatt-Hour) sales by 2.4% YoY.

The following table shows noticeable margins expansion for SO in 4Q'12 as compared to 4Q'11.

Table:1

4Q'11

4Q'12

Gross Margin

63%

66%

Operating Margin

16%

22%

Net Margin

7.5%

10.8%

Source: Quarterly Earnings

SO has been sharing its successes with it shareholders and has been increasing its dividends at a decent rate of 4% per annum in the last five years. Currently, the stock offers an attractive dividend yield of 4.4% and has a payout ratio of 73%. SO also has a strong dividend history; in 2012 it increased its dividend by 3.7%, making it the 11th consecutive year of dividend increase. Furthermore, SO has been paying quarterly dividends consecutively since 1948. The following table shows annual dividends and payout ratio of the company since 2008.

2008

2009

2010

2011

2012

Dividend (Annual)

$1.66

$1.73

$1.80

$1.87

$1.96

Payout Ratio

70.5%

75.5%

76%

73%

73%

Source: Company Reports

Furthermore, SO has a strong balance sheet and holds an "A" credit rating assigned by Fitch. It has a long term debt to equity ratio of 96% and a comfortable interest coverage ratio of approximately 5x.

Recent News

SO has filed a rate case increase of $172 million with regulators to cover the financing costs related to the construction of the Kemper County Plant. If the rate case is approved by the regulators, customers' bills will increase by approximately 20% by April 2013. The plant construction is almost 75% complete, and is expected to be operational by May 2014.

Recently SO announced its quarterly dividend of 49 cents, payable to its shareholders on March 6th, 2013. It currently has an annualized dividend figure of $1.96 per share.

Conclusion

SO has been delivering strong financial performance in recent times and it offers a high dividend yield of 4.4%, has high ROE of 12% and an attractive growth rate of 5% per annum for the next five years. Moreover, the company today announced strong 4Q'12 results. Therefore, I recommend that investors buy the stock.

SO

CenterPoint Energy, Inc. (CNP)

Duke Energy Corporation (DUK)

Edison International (EIX)

Forward P/E (based on 2014 EPS est.)

15x

15.3x

14.7x

14x

PEG

3.4

3.2

5

16

Five years growth rate

5%

5.5%

3%

1%

ROE

12%

9.5%

5%

-

Dividend Yield

4.5%

4%

4.5%

2.9%

Source: Yahoo Finance and Nasdaq.com

Source: Buy Southern Company On Strong Results