Dividend Strategy Session On Southern Company

Summary

• Dividend investors seeking to optimize income from their investments should look at ex-dividend dates and time their purchases accordingly. The question is, how?
• Analyzing historical performance for one of my core energy stocks, the Southern Company, I'll compare total returns around the previous 88 individual ex-dividend dates across three strategies.
• Is it best to forfeit the next dividend payment and benefit from a lower stock price in the beginning, or should you grab that next dividend payment?
• I will also show how much more or less in dividends investors can earn when buying the stock post the ex-dividend date.

SimonSkafar

Dividend investors seeking to optimize income from their investments can look at ex-dividend dates in order to time their purchases accordingly once they have made the "Buy" decision.

Timing the market can be challenging, and few investors consistently identify the ideal entry points. However, timing to optimize income from dividends is relatively straightforward. Purchasing a stock before its ex-dividend date qualifies you for the next upcoming dividend payment, while skipping the next ex-dividend date could potentially lead to a better entry price point since the stock is expected to trade at a discount on that date.

As Wall Street is starting to focus more on total returns and dividend contributions in a high interest rate environment dividend stocks will become even more attractive. Many of the most consistent and reliable dividend payers are "boring" companies that have been growing their dividends for decades without making any major headlines on a regular basis. Traditionally, in my view, the two most classic industries for these stocks are in telecommunications and utilities.

Within the utility sector I have been investing into Southern Company (NYSE:SO) since 2017 and despite the company having had its fair share of setbacks and costly project delays with its new nuclear power plant reactors, Vogtle 3 and Vogtle 4, I cannot complain about my investment.

Data by YCharts

Headquartered in Atlanta, the company primarily sells electricity and is structured into four segments: Traditional Electric Operating Companies, Southern Company Gas, Southern Power, and All Other. It sports a market cap of $75B and yields around 4.0% with the next at least 3% dividend hike expected to occur in mid-April.

I have conducted that analysis for a variety of stocks and am currently building a tool where we can look at these results collectively and across different sectors for a variety of stocks rather than individually.

Now, let's get straight into the analysis itself!

Using a $10,000 investment in the Southern Company as a case study, I analyzed how SO stock has performed on each of its ex-dividend dates over the past 22 years, totaling 88 observations. To do this, I compared stock prices the day before, on, and after the ex-dividend date.

The results for these 88 ex-dividend dates are not what I expected. Expressed in % of most beneficial outcomes (i.e. the strategy that yielded the highest return), it looks as follows:

• Buying the stock 1 day before ex-dividend date: 38 observations; 43.2%
• Buying the stock on the ex-dividend date: 9 observations; 10.2%
• Buying the stock 1 day after ex-dividend date: 41 observations; 46.6%

A very slim majority of 57% of outcomes favors not buying before the stock goes ex-dividend whereas 43.2% of outcomes benefit from buying the stock prior to its ex-dividend date.

I have run that type of analysis on other stocks in the past and for instance stocks like AT&T (T) which also have a rich dividend history and have been a corner stone of many dividend income portfolios I was surprised that the results for the Southern Company were far more balanced. In the case of AT&T, my most recent analysis concluded that in at least 7 of 10 cases it was beneficial not to buy before the stock goes ex-dividend.

In the case of Southern Company a 57/43 overall ratio does not deliver a clear message and is more comparable to a coin toss than to a "seeking alpha" strategy. Nonetheless, here are the detailed results of that first stage of the analysis.

Figure 1: Overview of occurrences of best outcomes by stock by year

Southern Company - Best Outcomes By Year (Designed by author)

In 10 of 22 years between 2001 and 2022, investors have fared better not buying the stock before the ex-dividend date. In 7 years it is a tie and only in 5 years (2005, 2008, 2011, 2018, 2022) the strategy of buying the stock prior to its ex-dividend date outperforms the counter strategy.

Advancing the analysis

Next, I have calculated the actual price changes of the stock around the ex-dividend dates (you can interact with the dashboard) as follows:

• Change Day 1. (Opening price ex-dividend date) - (Closing price ex-dividend date -1)
• Change Day 2. (Opening price ex-dividend date +1) - (Closing price ex-dividend date)
• Total Change. Day 1 + Day 2
• Total Discount/Premium. Total Change - Dividend per share

This total change over the two days has been put in relation to the actual dividend payment, which serves as a proxy for by how much the stock price would have been expected to drop if it were solely to reflect that change.

By putting that total discount/premium in relation to the actual dividend per share, we get something I have termed "discount/premium in dividends" and which is depicted below for all the ex-dividend dates contained in the analysis.

Discount(-)/premium(+) in dividends: (Total Discount/Premium)/Dividend per share

A simple reading example for a recent ex-dividend date on November 18, 2022 reads as follows:

Around the 11/18/2022 ex-dividend date investors could face a total premium of $1.14 over the two days around the ex-dividend date. Expressed in terms of dividends this amounts around 1.67 dividends lost. Or put differently, the drop over the two days did not take place. Instead of dropping the stock gained a lot of ground and investors should have definitely bought the stock prior to its ex-dividend date as only two days later the stock made up for that ex-dividend discount and more.

Southern Company - Discount vs Premium (Designed by author)

This is a very unusual behavior but in fact something that can be increasingly observed with Southern Company's stock. Even though it was found that generally only 5 years clearly favored buying the stock before the ex-dividend date the last 4 years clearly paint a different picture when assessing the total change over the two days around the ex-dividend date.

What's more, while it is good to know what the best strategy is with Southern Company around ex-dividend dates, we also need to shed light on the size of the opportunity by looking at the total discount/premium in dividends across several ex-dividend dates and across many years.

In fact, disregarding commissions and taxes, investors could have gained additional dividends in 11 out of the last 22 years by forfeiting the dividend and buying the stock post its ex-dividend date, so basically it is like a coin toss.

Southern Company - Dividends Gained or Lost (Designed by author)

Additionally, on an accumulated basis spanning over two decades, almost all the accumulated gains peaking at a whopping 8.85 dividends gained in 2016 have been eliminated by the end of 2022 as they collapsed to only 1.2 dividends gained. That is pretty shocking and abnormal compared to other analyses I conducted and further analysis and new hypotheses will be needed to help understand this.

One assumption is that as markets have started to act more and more erratic over the last couple of years fueled by zero interest money, social media and trading algorithms, the importance of the ex-dividend date alone and the expected ex-dividend discount have fared and whether good news or bad news even low beta stocks like Southern Company react stronger to these movements than in the past. And if those news days fall on the ex-dividend date it can completely distort the outcome.

It could also be the case that as the Southern Company stock has had some stellar years over the last 5 years with its dividend yield naturally declining as dividend growth could not keep up with price appreciation its dividend yield is too low for that historically successful strategy to work.

To better understand this behavior, let's create a tree-map, which is sized based on the "discount/premium in dividends" metric. This clearly shows when the best opportunities have occurred in the past. Similarly, it also shows when investors have lost dividends by waiting too long for the stock price to drop following the ex-dividend date.

Southern Company - Dividend Tree Map (Designed by author)

Again, the reading example helps understand what exactly is shown here.

Southern Company - Dividend Tree Map Reading Example (Designed by author)

I believe that this is a very powerful way of looking at the pricing action around ex-dividend dates for stocks.

Given the seemingly balanced success of that dividend strategy with Southern Company I will also extend this analysis to similar dividend stocks in the utility sector in order to understand if we can observe similar patterns there or if they favor more enticing and one-sided strategies.

To keep track of upcoming ex-dividend dates, I use the Dividend Calendar Tool (make sure to follow instructions here). This handy dividend calendar view allows me to view the respective next ex-dividend dates. Here is a sample screenshot of how this looks like (showing expected dividend payments in March for my portfolio):

My Dividend Calendar (Designed by author)

Investor takeaway

In summary, dividend investors who want quick income from their investments without having to sell anything could screen the market for ex-dividend dates and time their purchases accordingly. However, in the case of ARCC, it makes slightly more sense to forego the ex-dividend date and instead buy the stock on or after the ex-dividend date. Historically, this has produced slightly superior returns.

Although, as so often, results are subject to one's own individual interpretation. It shows that, for the Southern Company, solely relying on the stock price to decrease following the ex-dividend date would have been the best decision in the cases covered in this article.

Naturally, the "buy" or "not buy" decision should depend on far more factors than just the ex-dividend date, but it is one variable to consider when trying to optimize your income.

Nonetheless, the data is not very convincing in that case as the results are fairly balanced. For Southern Company, I would not follow that strategy and it remains to be evaluated if the pattern that was observed in the past before 2019 has been permanently altered or whether the current underperformance of the "buy on or after the ex-dividend date" strategy will reverse in the future.

In any case I consider Southern Company a cornerstone for my energy portfolio and will be happy to add on any weakness if it presents itself.

What do you think about the Southern Company? Are you timing purchases in line with ex-dividend dates or not care at all about this?

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SO either through stock ownership, options, or other derivatives. 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.

I am not offering financial advice but only my personal opinion. Investors may take further aspects and their own due diligence into consideration before making a decision.