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Summary

  • Southern Company is expanding capacity to address an expected increase in demand for electricity.
  • Southern Company is making moves in the solar market, which will enable it to profit from a fast-growing market.
  • Improving economic indicators suggest Southern Company's prospects are strong.
  • Southern has a handsome dividend yield which it should be able to sustain due to improvements in the business.

Public electric utility player Southern Company (NYSE:SO) is known for its handsome dividend yield of 4.90%. But, at the same time, the company has been witnessing good growth in the business. For instance, when Southern reported its second-quarter results, its revenue increased 5.2% year over year, beating Wall Street expectations, while earnings more than doubled year over year to $611 million from $297 million last year on the back of strong electricity sales.

What's more, Southern's prospects look strong as well, and as a result, its earnings growth is expected to continue going forward. Southern Company's focus on delivering clean, safe, reliable, and affordable energy to customers has helped it do well so far, and an improvement in the regional economies will allow it to sustain the momentum. Southern is aggressively investing in its projects in a bid to increase capacity.

Increasing capacity to address demand

The company has made progress in two of its key construction projects, Plant Vogtle and Kemper County, and expects them to deliver robust operational performance going forward. For instance, Southern is progressing at Unit 3 and 4 at its Plant Vogtle. It is working to complete the CA05 module for Unit 3 that is expected to get installed in September. Southern Company currently has 36 modules installed of the 47 sub-modules for CA01 on-site, and believes to install the completed module late in the fourth quarter this year or the first quarter next year.

In addition, Southern's subsidiary Mississippi Power has achieved major construction milestones that have led to good progress at Plant Ratcliffe at Kemper County. Southern Company has completed the pressure testing on both the gasifier trains, which is believed to be an important step toward heating up of the first gasifier projected for the late third quarter or the early fourth quarter.

Moreover, Southern Company has also closed pipe-tight status with greater than 900,000 linear feet of piping installed, sealed, and prepared for testing.

Expanding into solar

Southern has also closed the acquisition of the Macho Springs Solar Facility and Turner Renewable Energy during the second quarter. This is believed to be the largest solar project in New Mexico with 50-megawatt of production capacity, enough to power greater than 18,000 homes. Southern is keen on closing new solar and natural gas projects with creditworthy counterparties in a long-term contract.

This is a smart move by Southern, as the solar market is expected to grow at a good pace in the future. According to Solarbuzz:

Solar photovoltaic (PV) demand is poised for explosive growth in 2014, and is set to reach 49 gigawatts (GW), up from 36 GW in 2013, according to findings in the latest NPD Solarbuzz Quarterly.

"The solar PV industry has reached a critical tipping point, with end-market demand hitting record levels almost every quarter," added Finlay Colville, vice-president at NPD Solarbuzz. "This growth is being driven by leading module suppliers and project developers that returned to profitability during 2013, and which have now established highly-effective global sales and marketing networks.

Improving economic situation

Southern sees improving economic activity as a result of the rising industrial sector with 13 consecutive months of year-over-year industrial sales growth. This expansion in growth is steady, with national trends like the ISM Manufacturing Index hovering above 50, illustrating growth for the preceding 13 months.

Increasing exports will also contribute to high growth. The exports from Alabama and Georgia have expanded by 4.1%, roughly double the rate of the U.S. as a whole. There was a 6.3% increase in container exports from the Port of Savannah during the second quarter of 2014 as compared to 2.5% throughout 2013. Further, 90% of Southern's key customers believe that their sales for the second half of 2014 will be either similar or better than the first half of 2014.

Moreover, there are signs of slow recovery in housing. Home sales have increased from last year, according to a recent survey by Atlanta Federal Reserve, and, there's continued decline in the inventory level with modest increase in prices. This is a positive indication for the future.

In addition, builders and brokers expect the activity in the Southeast to increase in line with the internal measure of new connections. New housing activity increased 17% during the first half of 2014 as compared to the same period last year, and with better times expected ahead, Southern should see an improvement in electricity consumption.

Valuation

Southern Company's valuation also inspires confidence. It has a trailing P/E ratio of 20.18, and a forward P/E ratio of 15.27, which indicates reduction in costs and improvements in the company's earnings. The company also has strong operating cash flow, generating $6.22 billion in the last twelve months. Now, with Southern's earnings expected to grow at an identical rate in the next five years when compared to the last five, the company shouldn't have much difficulty in sustaining its dividend.

It has a payout ratio of 82%. Since Southern has strong cash flow, along with an expected sustainability in the bottom line, investors should continue enjoying the strong dividend yield. Finally, improving economic conditions, increasing capacity, and smart acquisitions should enable Southern to continue getting better.