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I am bullish on The Southern Company (NYSE:SO) as it offers investors a solid dividend yield of 4.4% and a potential price appreciation of 11%, based on my price target of $49 (calculation shown below). Also, the company has delivered strong financial performance in the past, and the trend is expected to continue as analysts are anticipating a next-five-years growth rate of 5% per annum.

Southern Company is amongst the leading utility companies of the U.S. It serves almost 4.4 million customers in four states of the U.S. It owns a generational capacity of approximately 43,000 MW, out of which 35,000 MW represents regulated generation and 8,000 MW represents wholesale generation. The company has diverse generational sources. Following were the generation mix for 2012: gas 45%, coal 36%, nuclear 17% and hydro 2%.

The company has delivered strong financial performance in the past and offered its shareholders attractive returns. Annualized returns (assumes all dividends are re-invested and returns are compounded monthly) offered by SO to its shareholders in the last 5, 10 and 30 years are as follows: 5 Years 9.9%, 10 years 11.4% and 30 years 16.3%.

The company has been able to post decent financial results in the past. EPS and dividends for the company grew annually by 3.5% and 4% respectively in the last five years. Also, margins (Gross and EBITDA margins), ROE and ROA for the company expanded over the years as evident by the graphs below.

(click to enlarge)
Source: Company Reports and Calculations

In the recent fourth quarter 2012, the company registered net revenues of $3.7 billion, which were flat if compared with corresponding period of last year. However, it was able to beat the quarterly earnings consensus by 10%, reported EPS for 4Q'12 came out to be 44 cents, up from 30 cents in 4Q'11.

Also, the company was able to grow its total retail sales by 2.6% in the recent fourth quarter. Total retail sales were mainly driven by residential segment, which experienced sales increase of 6.6% in the recent quarter. Moreover, SO was able to add 23,000 residential customers in the last year. Increase in sales trend for SO is expected to be in the range of 0.7% - 1.3% for 2013.
Source: Investors Presentation

Outlook
SO is projecting long-term growth rate in the range of 4%-6%. Also, the company introduced 2013 earnings per share guidance range of $2.68-$2.80, consistent with its long-term growth target. In Q1'13 the company is expecting to earn 51 cents per share. In contrast, analysts are anticipating next 5 years growth rate of 5%. Analysts' EPS consensus for Q1'13 and full year 2013 are 48 cents and $2.7 respectively.

Dividends
Currently SO offers a solid dividend yield of 4.4%. The company has increased its annual dividend from $1.66 per share in 2008 to $1.96 per share in 2012. Also, the company has consistent dividend payout ratio in the range of 70%-75% in the last 5 years. Moreover, the decent dividend coverage in the recent years reflects that the dividends offered by the company are sustainable.

(click to enlarge)

2008

2009

2010

2011

2012

Annual Dividend per share

$1.66

$1.73

$1.80

$1.87

$1.96

Payout Ratio

70%

75%

76%

73%

72%

Dividend Coverage

2.7x

2.4x

2.65x

3.7x

-

Source: Company Reports

Conclusion

SO

Duke Energy (NYSE:DUK)

Wisconsin Energy Corp. (NYSE:WEC)

NextEra Energy, Inc. (NYSE:NEE)

Average

Forward P/E

15.2x

15x

15.5x

13.6x

14.8x

PEG

3.3

4.2

3

2.4

3.3

Five Years Growth Rate

5%

3.7%

5.5%

7%

5.3%

Source: Yahoo Finance

SO is currently trading at a cheap forward P/E of 15.2x as compared to its own five years historical average of 17x. Also, SO has a PEG of 3.3, which is less than DUK's PEG of 4.2 indicating SO offers cheaper growth. Using SO's historical P/E of 17x and expected 2014 EPS of $2.92, I calculated a price target of $49. This offers potential price appreciation of 11%. Couple it with attractive dividend yield of 4.4%, it offers investors total return of more than 15%. Therefore I recommend investors to buy the stock.

Source: Southern Company Offers The Best Package