Southern Co (SO): 4.8% Yield & Decades of Dividends

Growth Prospects

Let’s be very clear: Southern Company is not a fast grower. The company has compounded earnings-per-share at 3.0% a year over the last decade. Dividends-per-share have grown slightly faster at 3.9% a year.

The company currently has a payout ratio of 80%. As a result of Southern Company’s high payout ratio, investors should expect dividend growth in line with earnings-per-share growth going forward.

One way that businesses with stable cash flows boost growth is through share repurchases. Reducing the number of shares increases earnings on a per share basis.

Unfortunately, Southern Company regularly raises capital through share issuances. This dilutes current shareholder ownership and reduces earnings-per-share (all other things being equal). Over the last decade, Southern Company has increased its share count at 2.3% a year. Had Southern Company been able to finance its growth without increasing share count, its earnings-per-share growth rate would have been a more respectable 5.3% a year over the last decade.

Fortunately, management does not plan to fund its current growth plans with more share issuances. The company’s financing plan (in the image below) aims to rely exclusively on debt through 2017. Simply halting share issuances will go a long way toward improving Southern Company’s growth.

Southern Company showed earnings-per-share growth of 1.5% in its most recent quarter. Southern Company is expecting earnings-per-share growth of between 3% and 4% in fiscal 2015. This is also in line with management’s long-term earnings-per-share growth goals. Given the company’s history, growth of 3% to 4% a year seems likely.

This earnings-per-per share growth combined with the company’s current 4.8% dividend yield gives investors in Southern Company expected returns of 7.8% to 8.8% a year.