The Southern Company (SO -1.56%) is the type of company that you buy and forget about for long stretches of time. When you go back and look at it a few times a year, the story is likely to be very similar to when you bought it. It is a slow-moving tortoise.
However, there's an important inflection point on the horizon that should make this reliable dividend payer more attractive to investors. Here are some things to know before things start to change in an important way.
1. Southern has an above-average dividend yield
Most investors looking at the utility industry will probably be in the market for dividend stocks. So it makes sense to look at Southern's yield right away. It is not the highest yield, but it is above the industry average, using Vanguard Utilities ETF (VDE -0.80%) as a proxy.
SO Dividend Yield data by YCharts
While the yield has been higher in the past, there's a caveat here. Over the past decade or so Southern has been working on a major capital investment project known collectively as the Vogtle Project. The two nuclear reactors in the project, which were approved for construction in 2012, wound up taking more time and costing more money than expected. For many years investors shunned the stock because of Vogtle-related problems, which pushed up the yield. That project is nearing completion, though, so it just isn't as much of an overhang anymore.
SO Dividend Yield data by YCharts
2. Southern has an impressive dividend history
Despite the problems with Vogtle, which included the bankruptcy of the project manager (Westinghouse), Southern has continued to increase its dividend. Its streak of annual dividend increases is up to 22 years at this point.
SO Dividend Per Share (Annual) data by YCharts
But there's a longer streak here to consider. For 76 years the dividend has either been held steady or increased. As the chart above shows, many of the utility's closest peers don't have as enviable a record. Clearly Southern places a high value on its dividend, which should make dividend investors very comfortable here.
3. Vogtle will free up resources for other things
One of the two nuclear power plants Southern is building is already up and running. The second is expected to be online in late 2023 or early 2024. When that happens, the cash drain from construction costs will end, and the two units will start bringing in revenue. Southern estimates that it will generate an additional $700 million in cash flow from operations. That cash can go toward other things.
For example, one knock against Southern is its leverage, which is at the high end among similarly sized peers. But a decade ago its debt-to-equity ratio was more in line with the group. The extra cash from Vogtle should help the company bring its leverage down.
SO Debt to Equity Ratio data by YCharts
The money will also go toward other capital investment projects the company has lined up. And management is hinting strongly that 2025 will see a major shift in the trajectory of the dividend. Over the past decade dividend growth has been much slower than the company's earnings growth. With Vogtle complete, management is likely to ask the board to better match dividend growth to earnings growth, which will mean a step up in dividend growth into likely the mid-single digits.
SO Dividend Per Share (Annual) data by YCharts
That may not sound like a huge figure, but it is actually quite attractive for a reliable dividend-paying utility. Assuming that dividend growth increases, Southern will become an even more attractive cornerstone investment for a diversified income portfolio.
Still a little work to be done
To be fair, the second Vogtle unit is still a work in progress, so Southern hasn't yet reached the vital pivot point. And even after the second nuclear power plant is up and running, it will be some time before there's a change to the dividend policy. But that just suggests that now, before the good news starts picking up, is a great time for a deep dive into The Southern Company. Indeed, investors are likely to price the stock at a higher multiple after the dividend starts growing at a faster clip.
