The Southern Company (SO -1.56%) operates regulated electric and natural gas utilities. It is a rather boring company, happily working with regulators to ensure it produces slow and steady growth for investors. And yet there's a subtle, but important, shift taking place in the business that you'll want to know about. If you buy Southern today you'll want to keep these three facts in mind.
1. Southern is boring and reliable
The Southern Company operates regulated utility assets serving 9 million customers with a heavy focus on the Southeast, as its name implies. Perhaps the biggest goal for the company is to ensure the reliability of its network so the power keeps flowing regardless of weather conditions. That keeps customers and regulators happy. And if they are happy, Southern is more likely to get its rate increases and capital spending plans approved.
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In general, Southern tends to have constructive relationships with its regulators. That's been a key benefit for investors over time, noting that the company's dividend has been increased annually for 22 consecutive years. However, there's an even longer streak behind that one, with the dividend held the same or increased for the last 76 consecutive years. That is the kind of boring performance that a conservative dividend-focused investor can really get behind.
The dividend yield today is around 4%, which isn't particularly high for Southern (more on this below). However, it does compare favorably to the 3.6% yield of the average utility, using Vanguard Utilities Index Fund ETF as a proxy, and the 1.5% yield of the broader market. Southern's reliable dividend history suggests it could be a strong cornerstone investment for a more broadly diversified portfolio.
2. Vogtle 3 is running and Vogtle 4 is coming next
The yield is near the lower side of Southern's recent yield range because it faced a very big overhang from two nuclear projects it was building, known as Vogtle 3 and Vogtle 4. The construction of these massive power plants did not go smoothly. Massive price overruns and long project delays led investors to avoid Southern's stock for many years.
However, Vogtle 3 was attached to the electric grid earlier in 2023. Vogtle 4 is expected to be completed in the first quarter of 2024. Now that this once-troubled capital investment is nearing completion, investors have begun to reevaluate the utility's stock. The outlook is far more upbeat than it once was.
The key here is that the spending associated with Vogtle 3 and 4 will stop and the two nuclear power plants will actually start producing cash flows. That's a big change, with the company estimating that Vogtle could add as much as $700 million to cash flow from operations once both units are running. If you are tempted by Southern's dividend consistency, the completion of the Vogtle project is a big plus.
3. Dividend growth could accelerate
Just having the Vogtle project done is great news, but the additional cash flows thrown off by the nuclear power plants will have material implications for Southern. Some of that money will probably be used to repay debt and some will likely get spent on other capital investment plans. But one use that should be of material interest to investors is on the dividend front.
Although investors shouldn't expect any material shift in the dividend policy right away, 2025 could be a pivotal year. Essentially, dividend growth has been kept to the low single digits during the construction of the Vogtle units. But management indicated that they'll likely suggest that the board of directors pick up the pace to more closely track earnings growth at some point soon. Given that 2024 is when Vogtle 4 is coming online, 2025 is the more reasonable expectation for a dividend policy change. However, the big takeaway is that this boring dividend stock could be just a little less boring in the future, from a dividend growth perspective.
Southern is more exciting than it seems
While Southern is, and will likely remain, a boring dividend-paying utility, that doesn't mean that there aren't interesting things going on with this business. The most notable right now is the nearly complete Vogtle project. And that could have very positive implications for long-term dividend investors going forward. If you are looking at Southern, you need to understand that boring is good but just a little less boring could be much better.
