Important Upcoming Catalysts For Southern Company

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 |  About: Southern Company (SO)
by: Horizon Investments

Southern Company (NYSE:SO) is one of the leading regulated utility companies in the U.S. Earnings of the company are mainly determined by regulated operations, which provide earnings stability. As SO has large regulated operations, rate cases filed by the company that establish potential earnings are important stock price catalysts.

Earlier this month, Southern Company's subsidiary Georgia Power filed a rate case requesting a $482 million (+6.1%) rate increase. Salient features of the rate case are as follows:

  • $334 million through base rates,
  • $132 million through the Environ Compliance tariff
  • and $16 million via demand side management and the municipal franchise fee tariff.

Apart from the request of a 6.1% rate increase, the company proposed a retail ROE of 11.5% as compared to the previous ROE of 11.15%. The filed rate case is adjusted for updated costs and investment undertaken by the Georgia Power. Approval of the filed rate case will positively impact the company's bottom line and rate base growth of the company. The outcome of the case is expected in December 2013.

Other than pending rate cases, dividend yield is also an important stock price driver for SO. The company currently offers a high dividend yield of 4.40%. SO, last week, announced a regular quarterly dividend of 50.75 cents per share, payable on Sept. 6, 2013. The company has a solid dividend history and the recent declared dividend is the 263rd consecutive quarterly dividend by the company. Also, the company has a healthy operating cash flow yield of 12.5%, which indicates that those dividends offered by the company are sustainable. SO has kept its dividend payout ratio in a moderate range of 70%-76% and has increased dividends at an average rate of 4% over the last five years. The table below shows the annual dividends and payout ratios from 2008-2013:

2008

2009

2010

2011

2012

2013*

Dividend (Annual)

$1.66

$1.73

$1.80

$1.87

$1.96

$2.03

Payout Ratio

70.5%

75.5%

76%

73%

73%

-

Click to enlarge

Source: Financial Reports

The company is scheduled to announce its Q2'13 financial results on July 31st, 2013. Analysts are expecting earnings per share of $0.69 and revenues of $4.32 billion for Q2'13. In contrast to consensus, SO earnings per share estimate for recent second quarter is $0.68. Moreover, analysts are forecasting a decent growth rate of 4.7% per annum for the next five years.

An important take away from the upcoming earnings release will be the update on development costs of Plant Ratcliffe. Any unexpected increase in the estimated costs will adversely affect the earnings forecasts and stock price of SO. Development and construction cost of the plant have already been increased by more than $1.10 billion over the original estimates.

Risks
As a dividend paying utility company, SO's share price is sensitive to changes in Treasury yields. 10 year Treasury yields have increased by 35% YTD. As Treasury yields rise further, I believe SO's stock price will experience a slight pull back to keep dividend yields higher in comparison to Treasury yields. The outcome of the rate case filed by Georgia Power is a risk as well, which can have a negative impact on the stock price if the requested rate increase of 6.1% and a ROE of 11.5% are not accepted by the regulators. Furthermore, unexpected costs and delays in ongoing constructions of two new reactors at Plant Vogtle, Unit 3 and 4, are still risks for the company's earnings growth.

Conclusion

Positive outcomes of the pending rate cases will boost earnings of the company. Also, the construction and development costs of ongoing projects are important stock price catalysts but any changes in the estimated costs will not bode well for the company.

Valuations remain attractive for SO as well. The company has a higher dividend yield of 4.4% as compared to American Electric Power (NYSE:AEP) 4.2% and Consolidated Edison Inc. (NYSE:ED) 4.1%. Furthermore, as shown below, the company has higher operating profit margin, net profit margin and ROE as compared to its competitors.

SO

Duke Energy (DUK)

AEP

ED

Dividend Yield

4.4%

4.4%

4.2%

4.1%

Operating Profit Margin

24%

22%

20%

19%

Net Profit Margin

12.5%

10%

8%

8.5%

ROE

11%

6.5%

8%

9%

Click to enlarge

Source: Yahoo finance

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.