Southern Company Is Trading At An Attractive Dividend Yield

| About: Southern Company (SO)
This article is now exclusive for PRO subscribers.

Over the last month the Georgia power rate settlement case remained a headwind to the stock price of the parent company, Southern Company (NYSE:SO). But now since the decision has been made, it is important to analyze the company's future prospects. The company has been serving more than 4.4 million customers with a generating capacity of nearly 46,000 MW. It has been operating electric utilities in four states primarily with the help of Alabama Power, Georgia Power, Gulf Power and Mississippi Power.

The Decision of the Georgia Rate Case: Favorable or Unfavorable?

The Georgia Public Service Commission unanimously approved a settlement on the rate case filed by the company in June 2013. The commission allows Georgia Power to increase rates by about $100 a year for the average residential customer by 2016. The company's retail return on equity [ROE] will be set at 10.95 percent with a retail ROE range of 10 to 12 percent whereas the company had requested an 11.5 percent return on equity.

The increase in rates will be effective over a three year rate plan with the new rates taking effect January 1, 2014. In the first year the rate will increase the average residential rate by $2.19 per month. An additional increase of $3.61 per month will be effective on January 1, 2015 and a $2.96 per month increase will be effective on January 1, 2016.

Although the results have not been as fruitful as desired, they were not altogether unsatisfactory. The approval of the settlement case will serve to boost investor confidence by ensuring stable revenues in the future.

The Company's Liquidity Could Improve after Possible Loan Guarantee

The company has been facing uncertainty regarding the construction of two large generation projects, the Kemper County and the Vogtle Nuclear Plant, due to delays and cost overruns. The construction of these projects will remain a headwind on the stock price until their completion and will hinder the profitability of the stock. The construction delays are contributing to increasing costs. The Kemper County project, with a generational capacity of 596MW, is already approximately $1.15 billion over the original estimated cost of $2.88 billion. The project is expected to be completed by 4Q2014. Another project, the Vogtle nuclear plant, with a generational capacity of 2200MW has also experienced a cost increase of approximately $750 million above the initial estimates. The Vogtle unit 3 is also expected to be completed by 4Q2017 while unit 4 is scheduled to be operational by 4Q2018.

The company has requested a loan guarantee of $3.5 billion from the Department of Energy to finance these projects, and this will reduce its debt issuance needs. The company's credit outlook will be strengthened further if it is able to get favorable financing from the department. The chances for the loan guarantee are high, as recently on December 12 the Department of Energy finalized plans for $8 billion in loan guarantees for advanced fossil energy projects. The department has yet to determine the allocation of the guarantees among the companies, but I believe that Southern Company is a strong candidate and would not be ignored by the Department.

Investment Thesis

Southern Electric is a high quality regulated utility company in the U.S. The completion of pipeline projects coupled with projected capital expenditures will be the key drivers that ensure long term growth. Similarly, the company's continuous shift towards regulated operations ensures stable and reliable revenues. The company's performance during 2013 has not been very promising. The company's stock price was $43 at the beginning of 2013 and rallied to 2013's year-high of 48.03 in April. Since then the price slightly dropped to just over $40 in December. The stock is currently trading near the low levels of the previous year at $40.76.

Given the long term growth prospects, I believe that the current stock price provides an attractive investment opportunity as it currently offers a high dividend yield of 4.98%. It is also worth mentioning here that the higher dividend yield is not manipulated and is supported by a solid operating cash flow of $5.26 billion and cash flow yield of 13%.


Southern Company is a high quality regulated utility company with operations in different states in the U.S. The company has been able to deliver solid returns throughout its history. Going forward, the utility sector will be experiencing the problem of poor forward electricity prices backed by slower anticipated demand. In addition, the rising interest rate environment caused those operating in the sector to invest more in expanding the regulated operations and curtail the magnitude of their merchant business. Given the gloomy outlook of the utility sector, it is hard for utilities to sustain higher returns.

However, I believe that Southern Company remains a potential investment for investors who want to have a stable and reliable income stream. Moreover, around 90 percent of the total revenues are backed by regulated operations which will further enhance the predictability of cash flows from operations. In addition, the attractive dividend yield will hinder the stock price from further decreasing.

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.