Please ensure Javascript is enabled for purposes of website accessibility

Will Southern Company Raise Its Dividend in 2016?

By Reuben Gregg Brewer - Feb 7, 2016 at 3:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Southern Co.'s got over a decade of hikes behind it, but one big corporate move is worth watching on the dividend front.

Southern Company (SO -3.55%) is one of the largest utilities in the United States. With 15 years of annual dividend increases and a yield of around 4.5%, it's a favorite of dividend investors. But Southern is making a big move in 2016 to expand its business and continues to spend heavily on utility projects. So it isn't unreasonable to wonder if Southern Company will raise its dividend in 2016 or not. The company is strongly hinting at a yes, but its still worth watching the dividend. Here's why.

Functionally, yes
Southern Co. has historically raised its dividend in the middle of year. The last increase was announced last May, with the dividend paid that June. So, technically speaking, as long as the dividend doesn't get cut, Southern Co. will have a higher dividend this year than last year. In other words, it doesn't need to raise the disbursement to extend its streak to 16 years.

But that's not how dividend investors want to see the annual streak extended. They want an actual increase to occur during the year. So as May approaches, dividend-focused shareholders will be watching closely for the news of the next increase. But will they be pleased with what they read?

Southern Company has plenty of fuel options today. Source: Southern Company.

Big changes
To Southern Co.'s credit, it has been making huge changes to its portfolio, decreasing its reliance on coal and increasing its exposure to cleaner options such as natural gas and renewables. That's great and has provided the company with the ability to shift between the cheapest fuel options. However, there are still two big projects being worked on that have, well, not gone as well as planned: a clean-coal plant with carbon capture technology, and a nuclear facility.

But despite the delays, cost overruns, and write-offs related to these projects, Southern Co. hasn't wavered in its support of the dividend. It's increased right through the tough spots. With a long operating history, management knows that, sometimes, big construction projects don't go as well as hoped. But, once complete, the company will be better off. So Southern Co. still sees the long-term payoff from these big expenses.

However, there's something else taking shape at Southern Co. -- an acquisition. Southern Co. is buying natural gas utility AGL Resources (NYSE: GAS). It's a pretty big deal, essentially doubling the number of customers that Southern Co. will serve in its largely Southeast region. The price tag is $8 billion plus the assumption of around $4 billion in debt.

Southern will have a quick growth spurt from the AGL acquisition. Source: Southern Company.

Southern Co. expects the deal to add to earnings from the get-go and believes it will allow for the "opportunity to raise the dividend growth rate, subject to board approval." So, on that score, it looks as if dividend increases, and larger ones at that, are what management is gearing up for.

But there's one small wrinkle. The acquisition, which is expected to close in the second half of 2016, still has to get through regulators. That includes regulators in each state where the combined company will operate. Southern Co. has generally positive relationships with its regulators, but all it takes is one regulator to turn the deal into a problem spot.

The troubles facings Exelon's (EXC -6.10%) proposed $6.8 billion acquisition of Pepco Holdings (NYSE: POM) is a prime example of what can go wrong on the regulatory front. Despite Exelon making multiple financial concessions, Maryland and Washington D.C. still oppose the deal because regulators say it will cause harm to the competitive landscape. One of the big fears, it seems, is that Exelon will stifle the growth of renewable power investment if the merger is consummated.

With Southern's difficult coal and nuclear projects making front-page news over the past couple of years, it's realistic to be concerned that regulators might not be as easygoing as they once were.

Yeah, most likely
The easy answer is that Southern Co. appears to want to raise the dividend again this year and in future years. In fact, management has pretty much stated that it wants to grow the dividend even faster than it has been of late. So I would expect a dividend incerase come May or June. But I would pay close attention to the AGL acquisition and what regulators have to say about the deal. Any problems here could put a fly in Southern Co.'s dividend ointment.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Southern Company Stock Quote
The Southern Company
SO
$70.54 (-3.55%) $-2.60
Exelon Corporation Stock Quote
Exelon Corporation
EXC
$43.26 (-6.10%) $-2.81

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
316%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.