Yield-starved investors should familiarize themselves with Southern Company (SO), a highly dependable business that has paid dividends every quarter for more than 65 consecutive years.
With a high yield of 4.4%, low stock price volatility, and a track record for outperforming the S&P 500 Index over the last 30 years, Southern Company is the type of business that we like to review for our Conservative Retirees and Top 20 Dividend Stocks portfolios.
Business Overview
The Southern Company is a major producer of electricity in the U.S. that has been in business for more than 100 years. The holding company’s four retail regulated utilities serve approximately 4.5 million customers across Georgia, Alabama, Florida, and Mississippi. Approximately 90% of Southern Company’s earnings are from regulated subsidiaries, and the company also has a small wholesale energy company.
Industrial customers account for 28% of the company’s sales, followed by commercial (27%), residential (27%), and other retail and wholesale (17%).
By power source, coal generated 33% of Southern Company’s total megawatt hours in 2015, gas accounted for 47%, nuclear was 16%, and hydro power was 3%.
The company’s mix of business and geographies will significantly change in the second half of 2016 when it closes its acquisition of natural gas utility AGL Resources. Southern Company’s customer count will double to roughly 9 million, and its energy mix will shift from 100% electric to a 50/50 mix of electric and gas.
Business Analysis
Utility companies spend billions of dollars to build power plants and transmission lines and must comply with strict regulatory and environmental standards. As capital-intensive regulated entities, utility companies typically have a monopoly in the geographies they operate in.
As a result, the government controls the rates that utilities can charge to ensure they are fair to customers while still allowing the utility company to earn a reasonable return on their investments to continue providing quality service.
Each state’s regulatory body is different from the next, and some regions have been better to utilities than others. The Southeast region has been friendly to businesses, and Southern Company operates in four of the top eight most constructive state regulatory environments in the U.S. according to RRA:
Source: Southern Company Investor Presentation
Southern also maintains strong relationships with regulators in part due to its reputation and the reasonable rates it currently charges, which are below the national average and perceived as being more customer-friendly.
The South region is also one of the fastest-growing in the country, which makes Southern Company a relatively more attractive utility than many others.
While regulation protects Southern Company’s monopoly business and helps it generate consistent earnings, it also makes growth more difficult. The company’s earnings have grown by about 3% per year historically, but its planned merger with AGL Resources is expected to boost earnings growth to a 4-5% annual clip.
In late 2015, Southern Company announced plans to acquire AGL Resources for approximately $8 billion. AGL is the largest U.S. gas-only local distribution company, serving about 4.5 million customers in seven states and generating approximately 70% of its earnings from regulated operations.
