A Dividend Stock To Retire On: Southern Company

Summary

• This long time dividend payer operates a defensive industry and has 1/10th of the volatility of the broader markets.
• With 16 years of consecutive dividend increases, income-minded investors have been able to retain their purchasing power by holding this stock.
• Read below to get the "lowdown" on this defensive gem of a stock.

Investment Thesis

For investors who seek long-term steady dividend income and low volatility, Southern Company (NYSE:SO) deserves heavy consideration.

The utility giant has paid an uninterrupted dividend since 1948 and has provided 16 years of consecutive dividend increases.

With a total return of 17.93% over the past five years and a beta of 0.10, I believe this stock is a nice pick for those looking for a defensive income play.

Follow along below as I dig deeper into this gem of a stock and provide detail on the company's operations.

The Company

Simply put, Southern Company engages in the generation, transmission, and distribution of electricity as well as the distribution of natural gas which results in approximately 9 million electric and gas utility customers.

Source

The company also constructs, acquires, owns, and manages power generation assets, including renewable energy facilities and sells electricity in the wholesale market; and distributes natural gas in Illinois, Georgia, Virginia, New Jersey, Florida, Tennessee, and Maryland, as well as provides gas marketing services, wholesale gas services, and gas midstream operations.

Source

You can see from the graphic above that Southern Company is emerging as a renewable energy powerhouse, (35 solar facilities, 8 wind facilities, 1 biomass facility, and 1 landfill gas facility) and that's good news for shareholders long term as these solar and wind projects come with tax benefits and cash flow.

Southern company constructs, operates, and maintains 82,000 miles of natural gas pipelines (pictured in the map above) and 14 storage facilities with total capacity of 158 Bcf to provide natural gas to residential, commercial, and industrial customers.

In addition, the company also owns and/or operates 33 hydroelectric generating stations, 29 fossil fuel generating stations, 3 nuclear generating stations (one pictured below), 15 combined cycle/cogeneration stations.

Pictured above: Southern Company's Vogtle nuclear power station near Waynesboro, Georgia.

Although, Southern Company doesn't perform all of these activities under one company, the utility powerhouse in fact has many subsidiaries that specialize in one "arm" of the utility ecosystem:

Source

Southern Company Financials

Boasting a $45.15 billion market capitalization, Southern Company definitely has a lot to look at. Let's start with earnings:

Yahoo Finance Chart

The company has consecutively beat earnings estimates for the previous 4 quarters (as seen above), and besides the earnings miss of Q4 2016, Southern has beat earnings consecutively since Q4 2013.

Although Southern Company beat EPS estimates in 2017, for the year overall EPS was less than impressive. Writing off the clean coal project (more on this later) cost shareholders over $2/share. Excluding unusual items, Southern Company reported EPS of $3.02 in 2017, compared to $2.55 in the previous year.

Sourced from Q4 2017 Earnings Presentation

For 2018, management has guided for full-year 2018 EPS to be between $2.80 to $2.95, (according to Q4 2017 Earnings Presentation Download here), which is essentially in line with performance of the last two years.

Whenever a company is consistently beating estimates, I'm always curious as to the amount of leverage it's taking on.

Let's take a look:

The number we need for this calculation can be found on the company's balance sheet. In order to find the debt-to-equity ratio, we simply divide Total Liabilities by Total Stockholder Equity:

So we can see that as of December 31 2017, Southern Company had $3.34 worth of liabilities for every $1 of stockholder equity, which is higher than the sector average.

It's somewhat normal for utility companies to carry high debt levels as their infrastructure requirements make large, periodic capital expenditures necessary. However, these are viewed as positive moves for the most part as the utility can now increase service rates if approved by the appropriate government bodies. For more information on utility rates and how they impact shareholders, view my water utility article titled "Say What You Want, But We All Need This."

As for Southern Company's return to shareholders, it currently pays out more than double of its earnings as a dividend, according to its trailing twelve-month data, which tells us that the dividend is primarily funded by the company's retained earnings. Although, going forward, analysts expect Southern Company's payout to fall into a more sustainable range of 77% of its earnings, which equates to a dividend yield of around 5.5%.

In addition, EPS should increase to $2.78, meaning that the decreased payout ratio does not necessarily equal a lower dividend payment. After all, the dividend focused title is probably what first grabbed your attention to this article. In the case of Southern Company, it has increased its dividend per share from $1.34 to $2.32 in the past 16 years and has not missed a payment since 1948 when it began paying a dividend totaling $0.15/share annually.

Kemper Clean Coal Project

Mississippi Power, a subsidiary of Southern Company announced in 2006 that it was going to transform its Kemper County, Mississippi coal burning power plant into a "clean-coal" power plant. It was supposed to be the nation's first new clean-coal plant capable of taking the world's dirtiest but most abundant kind of coal, lignite coal, and turning it into a dirt-cheap fuel providing electricity while churning out roughly the same carbon emissions as a power plant burning natural gas – a plus for the power bill as well as Mother Earth.

Over a decade later, the costs of the plant (that never operated correctly), skyrocketed from $1.8 billion to $7.5 billion now. The company recently threw in the towel on the project after citing it was not able to get the gasifiers on the 582 MW Kemper IGCC project to work consistently, therefore it would instead run the facility as a natural gas-fired plant and not use the gasifiers that were supposed to convert local lignite into a clean burning synthesis fuel. As for Mississippi Power, the company ended up absorbing $6.4 billion in losses.

Here's my take on this as a shareholder:

Obviously, the huge loss, for lack of a better word, sucks. The entire goal of this project was to operate a coal-powered plant that produced emissions comparable to a natural gas power plant. Ironically, the goal was essentially accomplished as Kemper now exclusively runs on natural gas, which in turn produces the emission levels of a natural gas plant. Okay so we absorbed the loss, licked our wounds and moved on. It was an expensive lesson for the entire industry that I don't think Southern Company will be eager to repeat in the future.

Besides, the company's recent investments into natural gas should bode well with shareholders given the growing importance of natural gas to the energy security of the U.S.

These moves demonstrate that the company is thinking about the long-term picture as a leader in clean energy.

In addition, Moody's recently upgraded Mississippi Power's Speculative Grade Liquidity (SGL) rating to SGL-2 from SGL-4 upon its successful refinancing of $900 million of bank term loans that were due on March 31, 2018.

Michael G. Haggarty, Associate Managing Director said: "The utility's issuance of $600 million of long-term senior unsecured notes to replace most of these loans has resulted in a considerable improvement in the utility's liquidity position that had deteriorated during the Kemper IGCC plant construction. Although $300 million of the term loans were rolled over into a new six-month term loan, Mississippi Power expects $400 million to $600 million of income tax refunds over the next 12 to 18 months related to the Kemper IGCC abandonment, which should facilitate the eventual repayment of this bank loan." Haggarty added.

A Defensive Hold

Besides the steady dividend yield, another reason I like being a Southern Company shareholder is because of its low volatility. For example, I thought it would be interesting to show the current one-month chart of both the S&P 500 and SO.

As we're all aware, the volatility in the broader markets as of late has been less than fun. Although, looking at Southern Company stock, the share price is up overall and sports a beta of 0.10 (highlighted in yellow):

Yahoo Finance Charts

This is another reason why Southern Company is a great blue-chip utility stock that can provide investors with a steady stream of income, especially with its current 5.3% dividend yield. The fact that it's a utility means that the very core of the business is backed by a collection of stable regulated assets, something that has allowed Southern to maintain or increase its dividend every year since 1948 as mentioned above.

Conclusion

Serving 9 million utility customers in nine states makes Southern Company one of the largest utility companies in the United States. Even with its large size, the company has proven nimble as coal was once the primary fuel for its electric fleet, while today, however, natural gas is roughly 50% of the total, with nuclear at 15% and renewables at about 5%.

With its recent investment in crucial natural gas pipelines, the company has further cemented itself as a vital part of the marketplace.

Over the years its dividend increases have roughly averaged 3%, allowing shareholders to maintain their purchasing power against inflation, which is a huge factor for those in retirement.

SO

data by

YCharts

With the current share price of Southern Company trading at its December 2015 low, it might not be a bad time to consider an addition to your portfolio.

At the end of the day, any stock with a beta of 0.10 or so is likely to put you to sleep. However, if you are in your 70s, that could be a very desirable attribute.

If you're interested in reading about the multi-billion dollar Vogtle Nuclear Plant and how it may affect you as a shareholder of Southern Company, I dedicated an entire article on the subject found here.

Thank you for reading about Southern Company and other investment ideas here on Seeking Alpha. If you enjoyed this article, you may also be interested in this monthly dividend payer nicknamed "mailbox money" due to its consistent monthly payouts. Additionally, I invite you to participate in discussion of the article content via the comment section below.

Analyst’s Disclosure: I am/we are long SO. 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.