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Southern Company (NYSE:SO), with 4.4 million customers and nearly 46,000 megawatts of generating capacity, is a holding company, which owns Alabama Power, Georgia Power, Gulf Power, and Mississippi Power, each of which is an operating public utility company. In this article, SO's fundamentals are reviewed to see if its dividend increase is supported.

Dividend Increase

On April 15, 2013, Southern Company announced the increase of its annual dividend by 7 cents per share to $2.03 per share, which marks the 12th straight year of dividend increase. Further, Southern Company increased 1.75 cents per share for the quarterly dividend to 50.75 cents per share, payable June 6, 2013 to shareholders of record as of May 6, 2013, which marks 262 consecutive quarters of consistent dividend distribution.

Analysts' Calls and Estimates

On April 15, 2013, Wells Fargo upgraded SO from market perform to outperform. Neil Kalton noted that shares of Southern Co have underperformed since 2011, a move he ties to the company's nuclear strategy, though these concerns are overblown in his view. Kalton said,

The upgrade of SO to Outperform from Market Perform is largely valuation driven as our assessment of SO's underlying fundamentals and growth outlook is relatively unchanged.

Analysts currently have a mean target price of $45.75 for SO, which is below the current closing price of $47.36 as of April 15, 2013. Analysts, on average, are estimating an EPS of $0.49 with revenue of $3.75B for the current quarter ending in March, 2013. For 2013, analysts are projecting an EPS of $2.76 with revenue of $17.78B, which is 7.50% higher than 2012.

Fundamentally, Southern Company's key stats will be compared with its peers, including Duke Energy Corporation (NYSE:DUK) and American Electric Power Co Inc. (NYSE:AEP), to see where it stands.

Southern Company

Duke Energy

American Electric Power

Industry Average

Market Cap

$41.15B

$50.94B

$23.83B

N/A

Revenue Growth (3 Year Average)

1.6

15.5

3.5

1.0

Operating Margin, %, ttm

27.0%

15.8%

17.8%

19.5%

Net Margin, %, ttm

14.2%

9.0%

8.4%

8.8%

ROE

12.6

5.6

8.4

9.7

Debt/Equity

1.0

0.9

1.0

1.1

P/E

17.9

24.3

19.2

20.9

Annual Dividend Yield

4.29%, after latest increase

4.23%

3.83%

N/A

Source: Morningstar

Southern Company has higher margins and stronger ROE as compared to DUK and AEP, as well as the industry average. Southern Company's revenue growth is also higher than the industry average, though below the growth for DUK and AEP. Overall, Southern Company offers a good mix of income and growth, whereas DUK and AEP offer better growth. Southern Company's profitability and sales estimates will also be compared to DUK and AEP, as seen from the charts below.

(click to enlarge)

Source: YCharts.com

Southern continues to maintain its highest ROE among the three while AEP's ROE has declined since mid-2012.

(click to enlarge)

Source: YCharts.com

Southern Company maintains the highest ROA among the three while DUK's ROA had weakened since mid-2011 and AEP's ROA had declined since mid-2012.

(click to enlarge)

Source: YCharts.com

Sales estimates are increasing for all three companies for the next fiscal year, where Southern Company is expected to generate $18.20B sales by the end of 2014.

Technically, the MACD (12, 26, 9) indicator is showing a slightly bullish trend. The momentum indicator, RSI (14), is indicating a strong buying momentum at 64.84. SO is currently trading above its 50-day MA of $45.43 and 200-day MA of $44.57, as seen from the chart below.

(click to enlarge)

Source: StockCharts.com

How to Invest

Southern Company continues to shift away from coal-based generation to natural gas and nuclear based power. Financially, Southern Company should be able to maintain its dividend growth with its high profitability, strong ROE, and steady revenue growth. The outlook for Southern Company remains stable. For bullish investors, a credit put spread of August 17, 2013 $41/$44 put can be reviewed, which will allow investors to gain some upside credit premium or to acquire SO shares at a price below $44 upon options expiration. Investors can also review the following ETFs to gain exposures to SO:

  • Utilities Select Sector SPDR (NYSEARCA:XLU), 8.54% weighting
  • Dow Jones U.S. Utilities Index Fund (NYSEARCA:IDU), 6.85% weighting
  • S&P Global Utilities Sector Index Fund (NYSEARCA:JXI), 4.35% weighting

Note: Investors and traders are recommended to do their own due diligence and research before making any trading/investing decisions.

Source: All Financial Signals Indicate Dividend Growth For Southern