Southern Company Earnings: Should Its Dividend Die?

Southern Company (NYSE: SO  ) reported earnings Wednesday, leaving investors with a mixed bag of lackluster sales but positive earnings. The world of utilities is changing fast, and the company's '90s-era energy portfolio has some investors questioning its future. Let's take a look at this quarter's earnings to see whether this stock's a diamond in the rough or just plain coal.

Number crunching
Southern's sales for this quarter came in at $3.7 billion, just 0.1% higher than in Q4 2011. Analysts had expected a 23% year-over-year increase to $4.5 billion . Although top-line revenue miffed Wall Street, the utility managed to make more with less for its bottom line. Net income jumped to $399 million, a solid 44% above 2011's fourth quarter .

For shareholders, net income translates into diluted earnings of $0.44 per share, 10% higher than analysts had predicted . Over the past eight quarters, Southern has bested analyst estimates five times . For Q3 2012, diluted EPS came in 6.4% higher than in Q3 2011, but missed Wall Street expectations.

Digging deeper
If you're investing in Southern today, you're investing in what it will be tomorrow. The company is overhauling its energy portfolio in an effort to move away from oil and toward nuclear and gas.

Source: Southern Company Q4 earnings presentation. 

According to Chairman, CEO, and President Thomas Fanning, the company generated more energy from natural gas than coal for the first time in its history. For 2012, that transition saved Southern approximately $1 billion in fuel savings .

In the company's own words, its Q4 earnings growth was mostly due to "reduced non-fuel operations and maintenance expenses," as well as "other retail revenue effects" (e.g., higher rates).

But Southern's not sitting on its haunches. Since 2009, the company has spent over $4 billion each year to ramp up its nuclear efforts and build "clean coal" generation facilities . In the next two years, Southern plans to spend $16.5 billion in capital expenditures. The largest chunk ($4.2 billion) will go toward maintenance, while environmental spending ($3.6 billion) and new generation ($2.6 billion) also take significant pieces of Southern's pie .

Dividend dynamite
Utilities have historically served as stalwart stocks for investors, but the days of sitting back and watching dividends deliver may be over. Southern's shrinking revenue isn't a quarterly fluke, it's a sectorwide trend that's likely to continue for at least the next 20 years. Energy portfolios and margins will make or break a company's profits, and Southern will have to keep up its capital expenditures if it wants to remain cost competitive in the future.

Although the company has steadily increased its dividend over the past years, its suffering stock price has pushed its yield down in recent years from a 5.5% high in 2009 to its current 4.4% level.

SO Dividend Yield Chart

SO Dividend Yield data by YCharts.

In its most recent earnings report, Southern listed "excel at the fundamentals" as its top priority . But its ever-growing dividend seems to be on autopilot, which makes me question if the company is considering the most effective use of its capital.

SO Dividend Yield Chart

SO Dividend Yield data by YCharts.

Dividends are just one way to return value to shareholders, and Southern's current dividend leaves less money for much-needed capital expenditures. Its 855% cash dividend payout ratio has left the company overextended, even as its latest earnings report promises 4% to 6% dividend growth in the years to come .

Company

Dividend Yield

Cash Dividend Payout Ratio TTM

Atlantic Power (NYSE: AT  )

9.6%

(54%)

Exelon (NYSE: EXC  )

7.1%

123%

First Energy (NYSE: FE  )

5.3%

(1,770%)

Duke Energy (NYSE: DUK  )

4.7%

(252%)

Southern Company

4.5%

855%

Consolidated Edison

4.3%

163%

Dominion Resources

4.1%

(1,769%)

National Grid

4%

163%

NextEra Energy

3.3%

(27%)

Source: YCharts and Yahoo! Finance; TTM = trailing 12 months. 

Foolish bottom line
Southern Company is in transition, and its gross profit margin to operating margin spread hints at a company with a fair amount of upside once capex upgrades kick in. But to get there, Southern needs to be spending wisely, and I'm unconvinced that management is putting long-term value ahead of short-term benefits. With an industry-average 17.6 P/E ratio and more expensive price-to-book and price-to-cash flow ratios , the utility's stock isn't exactly in the bargain bin, either. The company's headed in the right direction and its Q4 results show promise, but I'm not ready to give Southern my thumbs-up just yet.

As the nation's largest producer of nuclear energy, Exelon's energy portfolio offers a welcome change to Southern's coal connection. Combine this strength with an increased focus on renewable energy, and EXC's recent merger with Constellation places Exelon and its best-in-class dividend on a short list of top utilities. To determine if Exelon is a good long-term fit for your portfolio, you're invited to check out The Motley Fool's premium research report on the company. Simply click here now for instant access.


Read/Post Comments (4) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 01, 2013, at 7:04 PM, EquityBull wrote:

    One major catalyst I have yet to hear or read about for utility companies is the trend towards plug in hybrids and plug in electric vehicles.

    While just in the very early innings this trend is growing and as oil spikes higher it only adds fuel to the fire. I see new models at better prices from the automakers which are pure electric only cars as well as plug in cars with a small combustion engine.

    So look forward over the Obama years where the push for this will be huge. Now look 5, 10 and 20 years down the road as more plug in vehicles hit the grid. The money flow moves from the oil companies to the electric companies. Or if you consider that utilities will be using more natgas it just means that gas stations are no longer the toll booth to get your car fueled up. Instead the utility power grid is. The outlet in your garage.

    So take what today is probably less than 100k plug in vehicles and look down the road when we have 5, 10 or 20 million plus plug ins charging or topping off at home, office or maybe retail parking lots. This is going to spike electric usage. It is a brand new use for the power grid that did not exist 10 years ago but 10 years from today it will be enough to move the needle.

    Even if plug in's add just 5% to the total electric grid usage we see a meaningful spike. What if half the cars on the road in 20 years are all plug in's?

    Something to think about. Also as housing picks up these utilities get new customers and usage typically grows with that. Utilities have been crushed by the stagnant housing market but with the bottom here this will be a tailwind of sorts

  • Report this Comment On February 03, 2013, at 10:45 AM, datruthdog wrote:

    Although the company has steadily increased its dividend over the past years, its suffering stock price has pushed its yield down in recent years from a 5.5% high in 2009 to its current 4.4% level.

  • Report this Comment On February 03, 2013, at 10:46 AM, datruthdog wrote:

    That's what you wrote. A "suffering stock price" will increase the dividend yield, not decrease it.

  • Report this Comment On February 03, 2013, at 11:12 AM, thunderboltnova wrote:

    SO just had insider buying and Forbes rates it a top rated dividend stock. I agree with the increase of electric usage. All of our new technologies require the use of electricity.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2231796, ~/Articles/ArticleHandler.aspx, 10/24/2014 12:36:52 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement