Southern Company: Do Utilities Trump Pharmas?

| About: Southern Company (SO)
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Southern Co. (NYSE:SO) is an electric utility company with an annual dividend of around 4.8%. In turbulent times, electric utilities appear to be the last legitimate widows-and-orphans stocks. Pharma has lost that designation, especially after Wyeth's (WYE) plummet Wednesday and Pfizer's (NYSE:PFE) poor historical performance. The problem with having new drugs in the pipeline is if something goes wrong with them at any stage, gains in the stock price suddenly evaporate. That unpredictability makes electric utilities the safer bet, unless regulation becomes unreasonable.

I bought Southern Co. on July 30, 2008, the last day to collect the quarterly dividend, and after earnings had been released. Here's the skinny on the second-quarter earnings: they declined three percent because of a $67 million charge relating to Southern Co.'s development of international energy projects in the 1990s, more specifically leveraged leases. Still, Southern Co.'s net quarterly income was $416 million, and most of its customers are located in the faster-growing Southeast region of the United States.

I am concerned about more surprises in the leveraged lease area because like CDOs, it's very hard to ascertain how much money a company is losing on a lease when others are involved to limit risk and when the underlying asset is difficult to value. Here is the best definition of a leveraged leased I found, from's glossaries:

A lease that involves a lender in addition to the lessor and lessee. The lender, usually a bank or insurance company, puts up a percentage of the cash required to purchase the asset, usually more than half. The balance is put up by the lessor, who is both the equity participant and the borrower. With the cash the lessor acquires the asset, giving the lender (1) a mortgage on the asset and (2) an assignment of the lease and lease payments. The lessee then makes periodic payments to the lessor, who in turn pays the lender. As owner of the asset, the lessor is entitled to tax deductions for depreciation on the asset and interest on the loan.

A more detailed review of these leases is necessary to see whether Southern Co. has fully disclosed its potential liabilities and risks on various projects.