Current Troubling Issues
Southern Co (NYSE:SO) has experienced 2 recent setbacks which have hurt earnings in the short-run.
First, the company is building a coal gasification plant in Mississippi. The plant was originally expected to go online in May of 2014 but has been stalled 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.
Secondly, Southern Company is also experiencing delays for the construction of its Vogtle nuclear plants. The completion date has already been delayed 18 months. Every month of delay will cost Southern Company an extra $40 million. The full 18-month delay is expected to cost over $700 million
While troubling, these delays to not reflect long-term threats to Southern Company’s dominant position in the electric utility markets which it serves.
Utilities form natural monopolies. They are highly regulated as well. These two factors make utility businesses in general – and Southern Company in particular – highly stable.
Balance Sheet & Recessions
Southern Company is heavily indebted, as most utilities are. The company has around $25 billion in debt. In addition, the company has another $1.2 billion in unfunded pension liabilities. On top of that, Southern Company has $1.3 billion in preferred stock as well. The company has $220 million in cash.
The company has annual interest expenses and preferred dividends of around $870 million a year. Operating income a year is around $4 billion. While Southern Company has a large debt load, the company is not at risk of defaulting thanks to its large, stable cash flows.
The company’s performance over the Great Recession of 2007 to 2009 gives an example of consistency of Southern Company’s earnings:
- 2007 earnings-per-share of $2.28
- 2008 earnings-per-share of $2.25
- 2009 earnings-per-share of $2.32
- 2010 earnings-per-share of $2.36
Final Thoughts
It is very unlikely that Southern Company generates double-digit returns for investors going forward. Still, total returns of 7.8% to 8.8% a year coupled with low risk and low volatility make Southern Company an interesting choice for investors needing both safety and current income.
The company’s high 4.8% dividend yield and extremely low stock price deviation give it an above-average rank among dividend stocks with long histories using The 8 Rules of Dividend Investing.
Southern Co (NYSE:SO) has a price-to-earnings ratio of 16.8 using adjusted earnings. The company is likely trading around fair value at this time given its decent total return prospects and high scores for stability.
Disclosure: None
