On Monday May 20th, it was announced that Southern Co. (SO) would be replacing the head of its Mississippi utility amid growing concern about the cost of its Kemper coal power plant whose estimated price tag has ballooned to $4.3B. General counsel Ed Holland has been named CEO of Mississippi Power following the sudden retirement of Ed Day, who had headed the utility since 2010. Southern Company took a total of $540 million in charges against earnings related to Kemper in Q1. As a result of the company's announcement regarding its Mississippi utility I wanted to examine several of the reasons why I'm considering this higher-yielding utility play.
Overview: Based in Atlanta, Georgia, Southern Company together with its subsidiaries operates as a public electric utility company. The company is involved in the generation, transmission, and distribution of electricity through coal, nuclear, oil and gas, and hydro resources in the states of Alabama, Georgia, Florida, and Mississippi. (Yahoo! Finance) On Monday, shares of SO, which currently possess a market cap of $40.41 billion, a P/E ratio of 19.74, a forward P/E ratio of 16.17, and a forward yield of 4.37% ($2.03), settled at $46.40/share.
Dividend Behavior: Since January 29th, 2009, Southern Company has increased its quarterly dividend a total of five times by an average of $0.0174 each time. From an income perspective, the company's forward yield of 4.37% coupled with its payout ratio (currently 83.00%) and its continued annual increases could equate into a very viable income option for long-term investors in search of a consistent dividend growth.
SO Dividend data by YCharts
Q1 EPS Performance: On Wednesday April 24, Southern Company reported the results of what I believe to be a very fair first quarter. The company's Q1 EPS of $0.49/share missed street estimates by $0.01/share and its revenue of $3.89 billion surpassed street estimates by a margin of $0.14 billion. During the quarter, Southern Company took two considerable charges against its earnings, and they were a $333 million (38 cents per share) after-tax charge related to an increased construction estimate for Mississippi Power's Kemper County project and a $16 million (2 cents per share) after-tax charge related to the restructuring of a leveraged lease investment. Although both of these charges impacted the company's earnings, I still think Southern Company has a lot to offer considering a number of the company's traditional retail operations have positively affected quarterly revenues.
According to Thomas A Fanning, Southern Company's Chairman, President and CEO, "We continue to see positive signs of emerging economic growth in the Southeast, albeit at a slow pace. Activity in our economic development pipeline remains robust, and housing-related manufacturing segments are beginning to strengthen as well. These developments bode well for the recovery of our region and the future of our business." If the Southeast United States can continue to show signs of positive economic growth over the next 12-24 months, I see no reason why Southern Company shouldn't be considered a viable option at current levels.
Conclusion: When it comes to those who may be looking to establish a position in Southern Company, I'd continue keep a watchful eye on not only the company's dividend behavior over the next several years, as well as any key catalysts, such as its Mississippi utility that could negatively impact earnings growth through various types of charges.