Edited By Kate Boehme
Southern Company (SO) produces and distributes electricity to more than 4.4 million customers in the Southeast. It operates four electric utilities in Mississippi, Florida, Georgia, and Alabama and has more than 43,500 megawatts of generating potential. The majority of the company's generation potential comes from coal fired plants. Southern brands have a strong reputation for fantastic customer service and high reliability. Its stock is one of the most broadly held stocks in the United States of America.
Southern Company has a strong dividend history. It is increasing its dividend at a rate of four percent annually. The company currently offers a dividend yield of 4.33 percent. Furthermore, in 2012, it increased its annual dividend by seven cents per share to a total of $1.96 per share. The 3.7 percent increase marks the eleventh straight year that Southern Company has raised the dividend on its common stock. However, the company did recently announce an increase in quarterly dividends from $0.4725 per share to $0.49 per share.
In order to properly analyze Southern's dividend stability, I examined the company's earnings, debt, and cash flows.
(All Tables in this article are sourced From Morningstar.com)
The revenues are not increasing at a rapid rate but are showing steady trends. In the last year, Southern produced revenues of $17.657 billion, in comparison with $17.456 billion in FY2010. Revenues increased at a rate of 1.2 percent during FY2011 while, over the previous seven years, revenue growth remains at a steady 5.8 percent. Meanwhile, company earnings are increasing. In 2011, Southern produced healthy net earnings of $2.203 billion or 12.48 percent, representing an increase of 11.5 percent from FY2010. Southern's earnings-per-share are also increasing. The Company has produced earnings-per-share of $2.57 in FY2011, representing an increase of 8.4 percent from FY2010, which only produced earnings-per-share of $2.37.
Southern Co experienced an increase of 8.4 percent in its earnings-per-share over the last two years. I believe that Southern Co will produce an earnings-per-share of $2.70 for FY2012. Given the negative trend of many stocks' EPS estimates recently, the Southern numbers are impressive and encouraging to investors. Unfortunately, Southern reported a drop in sales during the most recent quarter, in Q2 of FY2012, with total sales dropping by three percent, including wholesale sales. Earnings were also negatively affected by near-normal weather during the second quarter of this year, as compared with an unusually warm second quarter in FY2011. This effect was partially offset by other retail revenues in the company's traditional operations.
Debt and obligations
Figures in Million
Short Term debt
Long term debt
Other Long term Liabilities
Southern debt has been mounting since FY2007. Over the past five years, this company reported its lowest debt in FY2007, with $16.593 billion, and its highest in FY2011, with $21.233 billion. Southern liabilities are also increasing at a rate of 22.68 percent, while company debt is increasing at 27.90 percent. Southern reported a debt-to-asset ratio in FY2011 and FY2010 of 0.36 and 0.37, respectively. With a debt-to-asset ratio less than one, it is generally accepted that the company has more assets over its debt. Southern's recent debt-to-asset ratio shows that it has good overall financial health. Meanwhile, the liabilities-to-asset ratio was constant at 0.69 for both FY2011 and FY2012. This ratio shows that most Southern assets are financed by debt. Southern's debt-to-equity ratio has remained stable but a bit high since 2010 at a rate of 2.24.
Figure in Million
Operating cash Flow
Free cash flows
Southern Co produced negative cash flows from FY2007 to FY2010. In the most recent year, this company reported positive numbers for its free cash flows. Southern cash flows are not in a bad position. The company has spent a lot of money on large investments and expect a fair return. However, the company still expects to spend an additional $5.42 billion on capital expenditures in FY2012 and $4.9 billion in FY2013. Southern has cash flow margins of 33.43 percent for FY2011 and 22.86 percent for FY2010. This year, the company will most likely produce positive cash flows. Cash flow margins are positive at the moment and cash flow margins show that Southern is not in need of borrowing to maintain its operations.
Southern's attractive profit margins and stable sales growth figures are making this company appealing in the current volatile market. I believe that Southern could be an attractive investment. Specifically, this company is an attractive investment for those who are seeking dividends and capital preservation in unstable markets. Respectable regulatory connections and rate structures, together with a dedication to the pure play, make Southern one of my preferred utilities. Its dividend is one of the finest in the industry. Regardless of slower utilization growth, I believe Southern Company can continue to achieve a steady dividend growth of 5 percent through 2016.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.