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Nasdaq Dividend Achievers: Southern Company

Summary Does Southern Company’s low volatility and high yield make up for its sluggish growth? See Southern Company’s impressive dividend history and competitive advantage analyzed. Southern Company makes a compelling investment case for risk-averse income-oriented investors. Southern Company (NYSE: SO ) is the third-largest publicly traded electric utility based on market cap. The company’s market cap of $40 billion is not far off from the only two larger electric utilities; Dominion Resources (NYSE: D ) with a market cap of $41 billion, and NextEra Energy (NYSE: NEE ) with a market cap of $45 billion. Southern Company supplies electricity to 4.5 million customers in Georgia, Alabama, Mississippi, and Florida. Southern Company is a member of the Dividend Achievers Index. Southern Company has paid steady or increasing dividends since at least 1982. The company has been paying dividends every quarter since 1948; one of the longer active streaks. The Dividend Achievers Index is comprised of businesses with 10 or more consecutive years of dividend payments. You can see the current list of all 238 members of the Dividend Achievers Index here . This article will look at Southern Company’s current events, competitive advantage, and future growth prospects. The company will be examined using The 8 Rules of Dividend Investing . The 8 Rules of Dividend Investing take a systematic approach to building a high quality dividend growth portfolio. Business Overview Southern Company generates 91% of its earnings from heavily regulated traditional utility businesses. The company generates the remaining 9% of earnings from its competitive wholesale electric business. Southern Company’s operations consist of the following subsidiaries and affiliates: Alabama Power Georgia Power Gulf Power Mississippi Power Southern Power Southern Nuclear SouthernLINC Wireless The company generates electricity through a variety of assets located throughout the South East, South, and South West United States. The image below shows the company’s electricity generating assets. (click to enlarge) Source: Southern Company March 2015 Business Overview Presentation Competitive Advantage Southern Company’s competitive advantage comes from its monopoly electricity provider status in the markets it serves. Electric utilities are natural monopolies due to the high cost of building power plants and the impracticality of moving your entire life because you don’t like your electricity provider. Southern Company is one of the largest publicly traded electricity companies. It has a long history of growth thanks to population growth and the controlled and highly regulated utilities market in the United States. The company’s strong competitive advantage virtually ensures slow and steady growth for years to come. Current Events & Growth Prospects Southern Company has experienced 2 recent setbacks. The company is building a coal gasification plant in Mississippi. The plant was originally expected to go online in May of 2014. Due to ongoing construction delays, the plant is now expected to go online during the first half of 2016. This 2-year delay has already cost Southern Company over $1 billion. The second setback for Southern Company is the ongoing delays in the two Vogtle nuclear plants. The contractor building the plants has stated that the construction completion date has been delayed by 18 months for each plant. Every month of delay will cost Southern Company an extra $40 million. The full 18-month delay is expected to cost over $700 million. Despite these setbacks, Southern Company is projected to grow earnings per share between 3% and 4% a year in 2015. This is a reasonable long-term earnings per share growth rate for the company. The GDP in the area is expected to grow at 3% in 2015, and Southern Company should match or slightly exceed this growth. As with most utilities, investors should not expect rapid growth from Southern Company. Total return should be between 7.7% and 8.7% from growth (3% to 4%) and dividends (4.7%). Recession Performance As one would expect from an electric utility, Southern Company’s operations were largely unaffected by the Great Recession of 2007 to 2009. The company’s earnings per share through the Great Recession and subsequent recovery are shown below to drive home this point: 2007: EPS of $2.28 2008: EPS of $2.25 2009: EPS of $2.32 2010: EPS of $2.36 2011: EPS of $2.55 The 8 Rules of Dividend Investing The sections below will compare Southern Company to other businesses with a long history of dividend increases using the 5 Buy Rules from The 8 Rules of Dividend Investing . Each rule has a short “why it matters” section, explaining why the rule is relevant. Rule 1: 25+ Years of Dividends Without A Reduction Southern Company has paid steady or increasing dividends since at least 1982 (when Yahoo Finance dividend data first starts). The company has paid regular dividends since 1948 and easily passes the first rule of dividend investing. Why it matters: The Dividend Aristocrats (stocks with 25+ years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year. Source: S&P 500 Dividend Aristocrats Factsheet Rule 2: Dividend Yield Southern Company has an extremely high dividend yield of 4.7%. The company has the eighth-highest dividend yield out of 156 stocks with 25+ years of dividend payments without a reduction. Southern Company’s high dividend yield should be especially appealing to income-oriented investors. Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013. Source: Dividends: A Review of Historical Returns Rule 3: Payout Ratio Using adjusted earnings, Southern Company has a high payout ratio of 75%. The company’s extremely stable cash flows mitigate the risk of Southern Company reducing its dividend payments, however. Still, investors should not expect dividend growth ahead of earnings-per-share growth due to the company’s high payout ratio. Southern Company has the 144th lowest payout ratio out of 156 stocks with long dividend histories. Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006. Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3 Rule 4: Long-Term Growth Rate Southern Company has grown its dividend payments at 6.9% a year over the last decade. This growth will slow going forward. Management is projecting a target of 3% to 4% earnings-per-share growth going forward. As discussed in the growth section above, this number is a fair growth estimate for the company. With an expected growth rate of 3.5%, Southern Company has the 102nd highest growth rate out of 156 stocks with 25+ years of dividend payments without a reduction. Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013. Source: Rising Dividends Fund, Oppenheimer, page 4 Rule 5: Long-Term Volatility Southern Company has an exceptionally low stock price standard deviation of just 16.85%. This is the third-lowest in the entire Sure Dividend database, behind only Consolidated Edison (NYSE: ED ) and Johnson & Johnson (NYSE: JNJ ). Southern Company’s extremely low stock price volatility should appeal to risk-averse investors. Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30, 2011. Source: Low & Slow Could Win the Race Final Thoughts With an expected total return of around 8.2% from dividends (4.7%) and growth (3.5%), Southern Company offers investors decent total return potential. The company shines with its extremely low stock price volatility. Southern Company’s combination of high yield and low volatility carries it into the top 20% of stocks using The 8 Rules of Dividend Investing . The company should appeal to investors looking for low risk, high income, and slow but steady growth. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

E.ON Should Continue To Outperform

FY 2014 numbers were in line with low expectations. Earnings are still declining, but at a slowing speed. Cash generation is strong enough to support leverage and to allow for new growth capex. The corporate split is well under way. Relative out-performance vs RWE should continue. E.ON’s (OTCQX: EONGY ) FY 2014 results were in line. Ebitda was in line with guidance, at Eur 8.3bn (USD 8.8bn), vs. consensus of Eur 8.4bn (USD 8.9bn). Net income came in at Eur -3.3bn (USD -3.5bn), broadly in line with consensus of Eur -3.2bn (USD -3.4bn). The Eur 5.4bn (USD 5.7bn) write-offs, most of which on the power plant, were well flagged. They now allow for a clean slate ahead of the corporate split. Adjusted net income was in line at Eur 1.6bn (USD 1.7bn). Management’s guidance for 2015 Ebitda of Eur 7-7.6bn (USD 7.4-8bn) is 5% short of the Eur 7.7bn (USD 8.1bn) consensus at the mid point. The outlook is weak, but largely reflected. The power price impact is smoother than for RWE ( OTCPK:RWEOY ). Achieved hedged prices are still coming into line with market forwards over the next two years. Nevertheless, among the two Germans, E.ON stacks up much better than RWE. The generation business accounts for ~21% of Ebitda, vs. ~36% for RWE. E.ON’s generation portfolio has a stronger cash flow base due to its better fuel mix. It is cash positive. Even when excluding the one off effects of the nuclear tax and provisions release, I estimate cash flow generation would have been flat y/y. Going forward, there will be a small positive impact from capacity payments in the UK. Leverage is still high at 4.1x Ebitda, but it is slightly less of a concern: Higher cash flows leave a greater degree of financial flexibility. And, there will be further cash inflows from the various announced disposals. There will be movement on gearing as the split will entail different balance sheet structures from today. Capex is twice the amount of RWE’s capex, with a correspondingly higher level of growth capex. I estimate that at least Eur 2.5bn will go into growth capex, most of which into renewables. That will build a stronger foundation for growth post 2015. In a sector that is returning to growth mode, E.ON has a good foundation in place: Renewables, one of the most important growth drivers, account for ~15% of Ebit, vs. ~8% for RWE. The split is well under way and both new companies are viable propositions. There will be intense scrutiny on the company’s ability to meet its nuclear liabilities post split. The government has commissioned legal studies, but not found any factors that were conducive to stopping the deal at this stage. So far, there will likely be a very public debate, but outright government intervention seems less likely. While the outlook is challenging for E.ON, I expect it to outperform on a relative basis. The shares are trading on a 16x 2015E P/E which is in line with the broader sector peer group. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.