Today I take a first look at a very large utility company in southeastern parts of the USA. Southern Co. is the third company out of 15 that I looking at from a Seeking Alpha article that I read last week. Most of the stocks in that article were 4-5% dividend yielders. I’m trying to figure out which ones are potential buys at much lower prices when the worldwide recession returns with a vengeance.
Southern Company (SO)
Share price: $44.44
Shares: 861.63 million
Market capitalization: $38.3 billion
Bonds outstanding: $3.2 billion. I don’t know why the $1.375 billion due in 2012 is not shown on the graphic below. This company has a lot of debt.
What the company does - Southern generates and distributes electricity to more than 4.4 million customers in the Southeast. It owns four electric utilities--in Alabama, Georgia, Florida, and Mississippi--and has more than 42,000 megawatts of generating capacity, the majority of which comes from coal-fired plants. Southern also operates a conservative merchant generation segment, Southern Power. Southern is one of the most widely held stocks in the United States.
Morningstar’s take - We think this well-positioned juggernaut from the Deep South could be an attractive investment for those seeking dividends and capital preservation in volatile markets. Enviable regulatory relationships and rate structures, along with a commitment to the pure-play regulated utility model, make Southern one of our favorite utilities and its dividend one of the best bets in the business. Despite slower usage growth, we think Southern can still achieve consistent dividend growth of 5% through 2015.
DIVIDEND RECORD – Southern Company is a consistent dividend payer typical of most mature utilities companies.
Dividend: $0.4725 quarterly
Dividend yield: 4.25% ($1.89 annual dividend/$44.44 share price)
Dividend payout ratio: 74.1% using Google Finance’s most recent EPS of $2.55 or 88.7% using the average adjusted earning power of $2.13 per share.
[My 5 year dividend chart from Google Finance isn’t working right now]
EARNING POWER – $2.13 six year average adjusted EPS @ 861.63 million shares
(Earnings adjusted for changes in capitalization)
EPS | Net income | Shares | Adjusted EPS | |
2006 | $2.10 | $1,573 M | 748 M | $1.83 |
2007 | $2.28 | $1,743 M | 761 M | $2.01 |
2008 | $2.25 | $1,742 M | 775 M | $2.02 |
2009 | $2.06 | $1,643 M | 796 M | $1.91 |
2010 | $2.36 | $1,975 M | 837 M | $2.29 |
2011 (est) | $2.74 | $2,364.19 M | 861.63 M | $2.74 |
EPS | Net income | Shares | Adjusted EPS | |
2011 Q1 | $0.49 | $422 M | 854 M | $0.49 |
2011 Q2 | $0.70 | $604 M | 862 M | $0.70 |
2011 Q3 | $1.06 | $916 M | 868 M | $1.06 |
2011 Q4 (est) | $0.49 | $422.19 M | 861.63 M | $0.49 |
2011 total (est) | $2.74 | $2,364.19 M | 861.63 M | $2.74 |
Six year average adjusted earnings per share is $2.13
Consider contrarian buying below $17.04 (8 times average adjusted EPS)
Consider value buying below $25.26 (12 times average adjusted EPS)
Consider speculative selling above $42.60 (20 times average adjusted EPS)
Southern Company is currently trading at 20.86 times average adjusted EPS. This is stock is speculatively priced.
BALANCE SHEET – [summary of company balance sheet]
Book value per share: $20.46
Price to book value ratio: 2.17 (under 1.0 is good)
Current ratio: 1.15 latest quarter (over 2.0 is good)
Quick ratio: 0.67 latest quarter (over 1.0 is good)
Debt to equity ratio: 1.06 (lower is better). This is pretty high.
CONCLUSION – Southern Co. (SO) is not a high dividend stock at its current price of $44.44. It would become a high dividend stock if its stock price dropped to below $31.50 (meaning it would begin yielding above 6%). The company is a dedicated dividend payer that currently has a dividend payout ratio of 88.7% using average adjusted earnings. Southern Co. is speculatively priced at 20.86 times is six year average adjusted earnings of $2.13. It has a lot of debt compared to equity and you would be paying over twice the book value per share to buy it at its current price. I recommend that you don’t consider buying Southern Co. until its price drops below $25.56. You would enjoy a much larger dividend yield and you would have much be odds of price appreciation at that price.
DISCLOSURE – I don’t own Southern Company (SO).
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