Linked here is a detailed quantitative analysis of Southern Company (SO). Below are some highlights from the above-linked analysis:Company Description: Southern Company is an Atlanta-based energy holding company and is one of the largest producers of electricity in the U.S.Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham NumberSO is trading at a premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 42.8% premium to its calculated fair value of $48.61. SO did not earn any Stars in this section.Dividend Analytical Data: In this section, there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%SO earned one Star in this section for 3.) above. SO earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1948 and has increased its dividend payments for 22 consecutive years.Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:1. NPV MMA Diff.
2. Years to > MMAThe NPV MMA Diff. of the $436 is below the $1,300 target I look for in a stock that has increased dividends as long as SO has. The stock’s current yield of 4% exceeds the 3.75% estimated 20-year average MMA rate.Peers: The company’s peer group includes: NextEra Energy, Inc. (NEE) with a 3.0% yield, Entergy Corporation (ETR) with a 4.4% yield, and CenterPoint Energy, Inc. (CNP) with a 2.8% yield.Conclusion: SO did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section, and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks SO as a 1-Star Very Weak stock.Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $49.25 before SO’s NPV MMA Differential increased to the $1,300 minimum that I look for in a stock with 22 years of consecutive dividend increases. At that price, the stock would yield 5.6%.Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,400 NPV MMA Differential, the calculated rate is 6.5%. This dividend growth rate is higher than the 3.0% used in this analysis, thus providing no margin of safety. SO has a risk rating of 2.00, which classifies it as a Medium risk stock.The stock is currently trading at a premium to its $48.61 calculated fair value. In addition, the company’s high debt to total capital of 64% (up from 61%) and negative free cash flow payout of -156% (prior -208%) will keep me from adding to my position at this time.More By This Author:McDonald’s Corporation Dividend Stock AnalysisChevron Corporation Dividend Stock AnalysisCaterpillar Inc. Dividend Stock Analysis
