Southern Co. Shouldn‘t Be Ignored for Its Steady and Growing Dividend
July 25, 2017
Southern Co Rewards Shareholders with a Growing Dividend Payout
Southern Co (NYSE:SO) is an electric and gas utility holding company, distributing electricity to homes and businesses in seven states across the U.S. It currently offers an impressively high quarterly dividend yield of 4.88% and has increased that yield for 15 consecutive years. The company’s earnings are very stable and easy to predict, as well as protected from inflation (which helps to explain the growth).
Southern Co is also recession-proof, as it provides a service needed every day by millions of people, and they will need that service regardless of the state of the economy. Consumers might give up on a vacation or a new car in a recession, but they’ll require electricity no matter what.
So for what other reasons do I find this stock impressive? Read on to find out.
Strong Revenue and Margins
Year after year, SO stock reports a top-line, increased, and growing revenue number. This can be traced back to the company’s increasing operating costs. Southern Co annual costs, including wages and electricity delivery fees, tend to go up because of inflation. However, this inflation is handed off to customers, who foot the bill in the company’s stead, resulting in gradually higher revenue.
The margins also remain steady and strong, leaving a growing amount of money remaining once business costs are accounted for. This leaves more to put towards other things, such as buying assets. For instance, in 2015, it acquired energy services holding company AGL Resources, creating a larger customer base and reducing the overall costs and revenue via the two combining. The merger also means higher margins as time goes on. (Source: “Southern Company to Acquire AGL Resources in $12 Billion Transaction, Creating Leading U.S. Electric and Gas Utility,.” Southern Co., August 24, 2015.)
Get Paid a Growing Part of the Revenue
Southern Co’s financial discipline is strong, hence the steady dividend; the company’s earnings have always been able to cover it. Over the past 10 years, the average payout ratio has been 81%, or $0.81 per $1.00 of earnings. Today, this ratio is sitting at 78%.
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As always, a company doesn’t have to pay out a dividend, but chooses to. Aside from the normal benefits of having shareholders, dividends in particular attract the kind of investor who stays in a position for the long term. Investors holding on to shares for longer lowers daily volatility, preserving capital, as high volatility leads to lower returns.
Southern Co is diversified, based on its segments. Gas Distribution Operations deals with natural gas local distribution utilities that build and manage natural gas pipelines and distribution. Gas Marketing provides natural gas commodities and related services. The Wholesale Gas division simply sells natural gas storage. Lastly, the Gas Midstream Operations is involved in gas pipeline-related investments.
The company also benefits from the high barrier of entry for its industry. Starting a new energy utilities company is difficult due to the large-cap investment and regulatory approval acquired. Southern Co, however, is well-established and fully entrenched in its business, hence the market share being on the rise.
Final Thoughts About SO Stock
Southern Co’s dividend yield of 4.88% is more than double the market average. No matter how the stock market performs, the dividend should enjoy steady growth and, with time, a higher dividend.
With not much of a return from savings accounts, SO stock is a great alternative investment opportunity. Also keep in mind that investors and savers look to savings accounts to protect invested capital, which is exactly what Southern Co offers. All-in-all, the business appears very shareholder-friendly, with continued rewards via a rare higher return on capital.
