Southern Company Earnings: Will Coal Kill This Dividend Stock's Success Story?

Southern Company exceeded Q2 2014 earnings, but its sizable coal stake continues to make it a risky investment.

Aug 19, 2014 at 11:13AM

Southern Building

Source: Southern Company 

Southern Company (NYSE:SO) did it again. For the third straight quarter, the utility exceeded earnings expectations. But with a substantial investment in increasingly archaic coal, is Southern Company as solid as it seems? Here's what you need to know.

Number crunching
Southern surpassed predictions for both top and bottom line numbers. On the top, Q2 2014 sales clocked in at $4.47 billion, well above estimates of $4.27 billion and higher than Q2 2013's $4.25 billion.

Southern also succeeded in turning those top line sales into stronger earnings. The company reported adjusted earnings per share (EPS) of $0.68, two cents above expectations and four cents above 2013's second quarter.

This is the third consecutive quarter that Southern Company has exceeded earnings expectations, a welcome respite from three earnings misses in 2013.

Beyond the numbers
Q2 was a crux point in investors' opinions of utilities. An extremely cold winter pushed most utilities' Q1 earnings well beyond expectations, creating an untimely gap in interpretable and investable information. With second quarter results in, analysts have been keen to separate the economic winners from losers -- and Southern has made the cut for now. Southern Company Chairman, President, and CEO Thomas Fanning couldn't agree more:

Southern Company's second quarter industrial sales growth is an indicator of the potential for a broader economic recovery across the Southeast. Our commitment to provide clean, safe, reliable and affordable energy has enabled us to continue to meet the needs of a region that's growing faster than the U.S as a whole.

For Q2, industrial kilowatt-hour sales jumped a seasonally-adjusted 3%, with overall electricity sales up 2.1%. With over 90% of Southern's earnings originating from its four regulated subsidiaries, electricity usage growth like that is the envy of every utility.

Reg Map

Source: Southern Company; regulated subsidiaries 

Can Southern keep it up?
Q2 2014 was a stellar quarter for Southern Company -- but a good quarter doesn't dictate long-term success. Looking ahead, Southern expects to grow both its EPS and dividend at an annual rate of 3% to 4%. If Q2 is any evidence, growing customer sales won't be a major problem. But how Southern meets that demand growth presents another issue entirely.

The company is embarking on an expensive $17 billion capital expenditure program for the next three years, with projects ranging from maintenance jobs to environmental spending to power base load expansion. Unfortunately, around $2.6 billion of this is slotted to cover unexpectedly high costs for Southern's Kemper County, Mississippi, clean coal power plant.

So Cap Ex

Source: Southern Company Overview Presentation 

Coal currently accounts for around 38% of Southern's 45,500 MW of generation capacity, an unsustainably sizable portion for a fuel that has continually been targeted by new environmental policy. Southern is planning to drop around 7,500 MW of coal by 2015, but the move may not be enough. A new EPA Clean Power Plan proposal further tips the scales of cost competitiveness away from coal, and investors would do well to keep an eye on this controversial legislation.

Do it for the dividend?
Historically, utilities have been some of the safest dividend stocks around. Southern's 4.7% dividend yield is enough to make most income investors salivate -- but it's important to look beyond quarterly payouts.

Increasingly active energy policies, a domestic natural gas revolution, and a volatile recovering market may mean Southern Company's solid past is irreflective of its future success. Southern beat on Q2 earnings -- but its risk factors are all too real, and there may be better dividend bang for your buck.

Diversify your dividends
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term, but there are significantly safer stocks than Southern Company. Knowing how valuable such a dividend portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

Justin Loiseau has no position in any stocks mentioned. The Motley Fool recommends Southern Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers