The Southern Company: Playing Defense With a Shot of Southern Comfort

| About: Southern Company (SO)
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Lately, the market seems to have been struggling a bit, making it prudent for conservative investors to adopt a more defensive posture. Given all of the uncertainty regarding the situation in the eurozone, ongoing instability in the Middle East, and whether the U.S. economy can continue to slowly drag itself out of a deep hole, etc., it's no wonder investors would be looking for safer havens.

Utilities are one area that's been showing some strength, and The Southern Company (NYSE:SO) is arguably one of the premier utilities in the U.S. Given SO's exposure to the "fall-out" from Japan's nuclear disaster, the stock unsurprisingly sold off sharply, dropping to a low of $36.51 on Match 19, 2011. Since then it has climbed steadily higher, except for a few days in the second week of April, when it dipped just slightly below its 50 DMA. It reached a new 52 week high of $40.87 on May 19th, and only sold off slightly since.

SO is a regulated utility, having minimal exposure to merchant power market, via its subsidiary, Southern Power. Normally, a regulated utility's biggest risk lays in the regulatory regime under which it operates. In the case of SO, the area that it operates in (the southeastern U.S.) has a very "business friendly" climate. The company is on good terms with regulators due to its good record of reliability and low cost of generation, which makes for "reasonable" rates, while still allowing SO an adequate return on its capital investment.

The Southern Company operates 4 utilities, serving Alabama, Georgia, Florida, and Mississippi, as well as the aforementioned merchant power firm, Southern Power. The 4 utilities are Alabama Power, Georgia Power, Gulf Power, and Mississippi Power. The merchant power operation is run on a very conservative basis. Plants are not built unless long term contracts are in place for the power produced, and current contracts have a life in excess of 10 years, and the customers are all investment grade firms, which minimizes credit risk. In addition, the contracts are structured in a fashion to a triple net commercial lease in real estate, with variable costs like fuel, and fuel transportation being the responsibility of the customer.

SO currently operates 3 nuclear plants, Farley, Hatch, and Vogtle. Vogtle is currently undergoing expansion with the addition of two additional pants, which would bring the total to 4. On June 11, 2010, the DOE agreed to conditional loan guarantees for the construction costs of Units 3 and 4. On March 25, 2011, the Nuclear Regulatory Commission announced the completion of its final supplemental environmental impact statement on the expansion, saying that "there are no environmental impacts" that would preclude issuing a limited work authorization and combined licenses for the reactors.

Another area of potential risk for investors is the fact that the majority of SO's plants are coal-fired. Although SO is in the forefront of research in carbon capture technology, given the increasing activism of environmentalists, with support from the current administration, the possibility remains that stricter controls may be mandated, and the costs of such controls are not allowed to be passed through to customers. This is where SO's good relations with its regulators will stand it in good stead.

Dividend investors should be heartened by the fact that SO just raised its dividend for the 10th straight year, and has paid a stable, or increasing dividend for 242 consecutive quarters (60 1/2 years!). The increase was for $.07/share, bringing the annual payment to $1.89/share ( $0.4725/qtr). This brings the current yield to 4.73%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.