The Southern Company (SO -1.56%) is one the largest regulated utilities in the United States. It has an enviable track record when it comes to rewarding investors, noting the 22 consecutive years of annual dividend increases it has under its belt. But for the last decade the business has been overshadowed by a massive capital investment project. The next three years should be very different.
Southern is almost done with Vogtle
The biggest news in 2023 for Southern was that it brought Vogtle Unit 3 online. This is one of two large scale nuclear power plants that the utility has been building for roughly a decade. The process has not been a smooth one. There have been massive cost overruns and frequent delays. Shareholders have been hit with multiple one-time charges to help pay for the development effort.
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But getting the first of the two nuclear power plants that make up the Vogtle project attached to the grid was an important milestone for Southern. The second plant, Vogtle Unit 4, is slated to be online in early 2024. Building large nuclear power plants is not an easy task. The effort is complex and costs a lot of money. Which is why, for the past decade, Southern Company has focused on growing its dividend at roughly the rate of inflation so it could conserve cash. While the 3%-a-year dividend growth rate, annualized, over the past decade isn't exciting, it did maintain the buying power of the dividend for investors. And that occurred even though it was a difficult period for the company.
Once Vogtle Unit 4 is attached to the grid, however, the story will change dramatically. First off, the capital investment in this project will stop. Thus, there will be less money going out the door. And, second, the two new Vogtle units will be generating cash flow. The company estimates that it will produce around $700 million in additional cash from operations once both units are attached to the grid.
A new dividend trajectory for Southern
Although there won't be a change in the dividend policy right away, management has hinted strongly that sometime in the next few years there will be. The shift is basically going to go from maintaining the buying power of the dividend to growing the dividend in line with earnings. That's likely to mean the growth rate will jump up into the mid single digits from the low single digits.
There are some key goals to hit first, which explains the time lag between getting Vogtle 4 running and the new dividend policy. First, Southern expects to put some of the extra cash toward debt reduction. Second, it has other capital investments it wants to support. And, third, it is looking to lower its payout ratio below 70%. The payout ratio is expected to be around 77% in 2023, so it could take a couple of years to achieve this goal.
While there's no way to tell today when Southern's board will step on the accelerator in terms of dividend growth, it seems highly likely that it will happen within the next three years. While 2024 is almost certainly not going to be the year, 2025 is a real possibility. And if that's not the year, then 2026 seems highly likely.
The Southern story changes in 2024
For about a decade, Southern's conference calls have been filled with discussions about the Vogtle project. That's going to be the case for at least a few more calls. But once this massive nuclear power construction project is over, and the two new nuclear units have proven reliable, Southern will be setting out on a new path. In the next three years that will likely include a material change in the dividend policy, which will make the stock much more attractive for income investors. If you've been avoiding Southern because of the Vogtle project, you might want to revisit the stock today.
