The Southern Company (SO -1.56%) is in the middle of doing something that no other U.S. utility is doing. It has completed one large-scale nuclear power plant and hopes to have a second one up and running by early 2024, at the latest. Building these two power plans hasn't been an easy process, but the stock still managed to perform very well relative to those of peers over the past decade.
Here's a look at how well patient dividend investors have done, and some thoughts about the rewards that could accrue from here.
The last decade has been tough at times
If you'd invested $10,000 into Southern 10 years ago, that investment would be worth a little under $16,000 today, looking at the stock price performance. That's a lousy return compared to the S&P 500 Index, using the SPDR S&P 500 ETF (SPY 0.95%) as a proxy, which would have turned the same investment into nearly $26,700. However, utilities are generally expected to be slow and steady investments, usually with a heavy emphasis on dividends. Utilities Select Sector SPDR (XLU -1.09%), which owns the utility stocks contained in the S&P 500, would have turned $10,000 into about $16,700. That's a better benchmark, and the returns are a lot closer.
Things look a little different when you include dividends into the mix, assuming dividend reinvestment, to come up with a total return. The S&P 500 still comes out on top, with $10,000 growing into $32,000 over the past decade. That's no shock. However, the Utilities Select Sector SPDR ETF, with dividend reinvested, would have turned $10,000 into about $23,200, while Southern would have turned that amount into nearly $24,500.
SO Total Return Level data by YCharts
It's worth noting that Southern's dividend yield is around 4% today. The Utilities Select Sector SPDR ETF's yield is about 3.1%. On an absolute basis that's not a huge difference, just 0.9 percentage points. But from a percentage point of view, Southern is yielding a huge 29% more, and that extra income clearly adds up over time when you reinvest dividends. Southern's yield isn't just higher today, it has generally been higher for the entire 10-year period in question here.
SO Dividend Yield data by YCharts
Slow and steady works out well
With 22 years of annual dividend increases and 76 years in which the dividend was either held constant or increased, reliable income is a big part of the equation when you buy Southern. What's notable is that the stock lagged that of the average utility pretty badly from around 2017 to roughly 2019. That had a lot to do with the company's plans to build two new large-scale nuclear power plants (collectively known as the Vogtle project). At that point things weren't going well, with cost overruns, delays, and the bankruptcy of the project's main contractor all making headlines.
It would have been hard to buy or own Southern through that span. But the company worked through the problems, actually taking on the lead role with Vogtle, and the first nuclear reactor is now up and running. The second is set to come online later in 2023 or in early 2024. Investors are starting to get more upbeat about the future.
There's a good reason for that, too, since management expects cash flow to increase by around $700 million as this one-time cash drain turns into a cash producer. That extra money will most certainly go toward two things: additional growth-oriented capital spending and debt reduction. But some of that cash will likely find its way into the dividend as well, which could lead Southern's dividend growth rate to increase from the low single digits into the mid-single digits.
Again, that's not a huge change on an absolute basis, but going from 3% dividend growth (the average over the past decade) to perhaps 5% is a big percentage change. It would also shift the dividend from keeping up with the ravages of inflation to growing the buying power of the dividend over time. Investors would likely place a higher value on Southern's stock if dividend growth picked up.
So investors that stuck it out while Southern was muddling through this troubled capital investment project have been well rewarded from a total return perspective. A big part of that, however, is because when the stock was underperforming the dividend was buying more shares. And now that the project is finally coming to fruition and the stock has recovered, those extra shares have leveraged into a bigger upside gain. But here's the exciting thing: Going forward, things could get even more rewarding if dividend growth picks up.
Get ready for the new Southern
For a very long time, Southern has been overshadowed by the Vogtle project. That's starting to fade, and this reliable dividend stock has begun to recover. Long-term investors that held firm have come out quite well compared to the average utility despite all the bad news the project created. Now that Vogtle's end is in sight, though, the utility seems set for a new stage. That seems likely to include a higher dividend growth rate which could make this high-yield stock even more attractive going forward than it was in the recent past.
