The Southern Company (SO -1.56%) provides natural gas and electricity to customers across several Southeastern U.S. states. It is a fairly uneventful utility with a reasonably attractive dividend yield of around 4.1%, notably better than the average utility's yield of around 3.6%, using Vanguard Utilities Index ETF (VPU -1.14%) as a proxy. The biggest selling point today is growth, but that needs a bit of an explanation.
Southern is a reliable dividend stock
Southern's dividend has been increased annually for 22 consecutive years. This is actually more impressive than it may sound at first, given the headwinds the utility faced over that span. From an external view, there was the coronavirus pandemic and the Great Recession. Internally, the company was building two nuclear power plants, collectively known as the Vogtle Project, that were badly delayed and way over budget. So, keeping the dividend streak going despite facing multiple adverse situations shouldn't be ignored.
SO Dividend Per Share (Annual) data by YCharts.
However, the story doesn't end there. The dividend has actually been held steady for increased for 76 consecutive years. That's a streak that Southern's largest competitors should be envious of. Take a look at the graph above; even industry darling NextEra Energy (NEE -1.36%) had a dividend reduction if you go back far enough. Slow and steady dividend growth, though perhaps not annual dividend growth, is something that most conservative income investors should be able to appreciate.
Meanwhile, the dividend growth rate is likely to pick up in the next few years. While Southern has been working on the Vogtle Project, dividend growth has been mired in the low single digits. That giant investment is nearing completion (likely in early 2024), and then the costs will subside, and the power plants will start producing cash flow. Some of that cash will likely be used to push the dividend higher once the payout ratio drops below 70%. Mid-single-digit dividend growth could show up as soon as 2025.
While the dividend growth story is attractive, it's not the only growth story that's unfolding at The Southern Company.
More demand means more spending
As a regulated utility, Southern has to get its rates and capital spending plans approved by the government. The trade-off is that regulators provide it with a reliable and reasonable return on the investments it makes to ensure that customers have power. Bull markets, bear markets, and recessions have a minor impact on the company's spending, but the plans generally come off as expected over time because customer reliability is a key focus. And that is where the growth story gets really interesting because Southern is seeing an increase in demand.
Right now, Southern has capital investment plans of roughly $43 billion over the next five years. That pays for things like the completion of the Vogtle Project but also more mundane investments like hardening power lines so they can better handle bad weather conditions. The spending is also going toward the shift in energy production from carbon-intensive assets to clean energy. There's a lot in the mix, but the end goal is to ensure a reliable energy supply to the utility's customers.
During the company's third-quarter conference call, management highlighted that it will be updating its five-year plan soon. That's not unusual; it happens every year. But this time around, it explained that there would be a large increase because it was seeing more demand than it expected. That will push the five-year spending plan up to at least $45 billion. A notable increase. What Southern is trying to figure out right now, as it goes through the planning process, is how much higher than $45 billion it will go.
This is where it gets really interesting. As noted, every penny of that spending is overseen by regulators, and every penny earns a return set by the regulators. So, the more Southern spends, the more its earnings power grows. While Southern is never going to be a high-growth technology stock, it does appear to be ready to step up to a new level of growth after a rough patch during the Vogtle Project. That uptick will likely be greeted kindly by income investors because it will also support further dividend growth.
Wall Street is already catching on
The truth is that Southern's stock has performed much better of late as the Vogtle project nears completion. The dividend yield of around 4.1% is toward the lower side of the 10-year range here. However, given the likely uptick in dividend growth and the increase in the capital spending budget (which hints at faster business growth), there could be more upside ahead as investors reevaluate the growth potential of this utility. If you don't start digging in now, you might miss the chance to own Southern before the business steps up to a higher level of performance.
