Tag Archives: dividend-ideas

Southern Company: 4.8% Yield And Decades Of Dividends

Summary Investors can expect 7.8% to 8.8% total returns from Southern Company. The company has an exceptionally long dividend history. Is Southern Company over indebted? Southern Company (NYSE: SO ) is a large cap utility that supplies electricity to 4.5 million customers in Georgia, Alabama, Mississippi, and Florida. What stands out about Southern Company is its stability and consistency. The company has paid dividends every quarter since 1948 . In addition, the company has not reduced its dividend as far back as I can find. My records stopped in 1982 – it’s been at least that long since the company has been forced to reduce its dividend payments. The image below shows its more recent dividend history: (click to enlarge) These are not small dividends either. Southern Company currently has a dividend yield of 4.8%. The company’s long history of dividend payments makes it a member of the Dividend Achievers Index. Click here to download a list of all 238 members of the Dividend Achievers Index . It’s not just Southern Company’s dividends that are stable. The company’s stock price exhibits low volatility as well. Southern Company’s 10-year average stock price standard deviation is just 16.9%. For comparison, the only other large cap stocks I’ve found with lower standard deviations over the last decade are Johnson & Johnson (NYSE: JNJ ) and Consolidated Edison (NYSE: ED ). If you are interested in high yields and stability with inflation-beating growth, then Southern Company makes a compelling investment to consider further. Business Overview Southern Company generates over 90% of its earnings from the heavily regulated utilities industry. The remaining income comes from competitive wholesale electricity sales. The image below shows the company’s current and “under-construction” portfolio of power assets. The company’s entire portfolio is spread across the Southern half of the United States – hence the name “Southern Company.” (click to enlarge) Growth Prospects Let’s be very clear: Southern Company is not a fast grower . The company has compounded earnings per share at 3.0% a year over the last decade. Dividends per share have grown slightly faster at 3.9% a year. The company currently has a payout ratio of 80%. As a result of Southern Company’s high payout ratio, investors should expect dividend growth in line with earnings per share growth going forward. One way that businesses with stable cash flows boost growth is through share repurchases. Reducing the number of shares increases earnings on a per share basis. Unfortunately, Southern Company regularly raises capital through share issuances . This dilutes current shareholder ownership and reduces earnings per share (all other things being equal). Over the last decade, Southern Company has increased its share count at 2.3% a year. Had Southern Company been able to finance its growth without increasing share count, its earnings per share growth rate would have been a more respectable 5.3% a year over the last decade. Fortunately, management does not plan to fund its current growth plans with more share issuances. The company’s financing plan ( in the image below ) aims to rely exclusively on debt through 2017. Simply halting share issuances will go a long way toward improving Southern Company’s growth. (click to enlarge) Southern Company showed earnings per share growth of 1.5% in its most recent quarter . Southern Company is expecting earnings per share growth of between 3% and 4% in fiscal 2015. This is also in line with management’s long-term earnings per share growth goals. Given the company’s history, growth of 3% to 4% a year seems likely. This earnings per per share growth, combined with the company’s current 4.8% dividend yield, gives investors in Southern Company expected returns of 7.8% to 8.8% a year. Current Troubling Issues Southern Company has experienced 2 recent setbacks , which have hurt earnings in the short-run. First, the company is building a coal gasification plant in Mississippi. The plant was originally expected to go online in May of 2014 but has been stalled due to ongoing construction delays. The plant is now expected to go online during the first half of 2016. This 2-year delay has already cost Southern Company over $1 billion. Secondly, Southern Company is also experiencing delays for the construction of its Vogtle nuclear plants. The completion date has already been delayed 18 months . Every month of delay will cost Southern Company an extra $40 million. The full 18-month delay is expected to cost over $700 million While troubling, these delays to not reflect long-term threats to Southern Company’s dominant position in the electric utility markets which it serves. Utilities form natural monopolies. They are highly regulated as well. These two factors make utility businesses in general – and Southern Company in particular – highly stable. Balance Sheet and Recessions Southern Company is heavily indebted, as most utilities are. The company has around $25 billion in debt. In addition, the company has another $1.2 billion in unfunded pension liabilities. On top of that, Southern Company has $1.3 billion in preferred stock as well. The company has $220 million in cash. The company has annual interest expenses and preferred dividends of around $870 million a year. Annual operating income is around $4 billion. While Southern Company has a large debt load, the company is not at risk of defaulting thanks to its large, stable cash flows. The company’s performance over the Great Recession of 2007 to 2009 gives an example of consistency of Southern Company’s earnings: 2007 earnings per share of $2.28 2008 earnings per share of $2.25 2009 earnings per share of $2.32 2010 earnings per share of $2.36 Final Thoughts It is very unlikely that Southern Company generates double-digit returns for investors going forward. Still, total returns of 7.8% to 8.8% a year, coupled with low risk and low volatility, make Southern Company an interesting choice for investors needing both safety and current income. The company’s high 4.8% dividend yield and extremely low stock price deviation give it an above-average rank among dividend stocks with long histories using The 8 Rules of Dividend Investing. Southern Company has a price-to-earnings ratio of 16.8 using adjusted earnings. The company is likely trading around fair value at this time given its decent total return prospects and high scores for stability. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Southwest Gas Corporation: Strong Dividend Payer For The Long Term

Summary Arizona/Nevada are currently weak markets but will marginally outperform long-term. The Non-Utility business is incredibly strong and provides some geographically-diversified earnings. Expect the dividend to be increased aggressively in the coming years, growing into a more healthy yield. Southwest Gas (NYSE: SWX ) is engaged in the business of purchasing, distributing, and transporting natural gas for customers in portions of Arizona, Nevada, and California. Arizona and Nevada are the primary markets for Southwest Gas, where the company operates as the largest supplier of natural gas to residential consumers and businesses. While the business model may seem simple (buying gas and transporting to the end customer) the reality is the company must operate an intricate network of transmission mains, peak shaving/storage stations, and a web of pipelines to get natural gas from point A to point B efficiently. As you may expect, businesses like Southwest are regulated by state authorities much in the same way power-generating utilities are. Like other utilities, the company offers a safe, predictable stream of cash flow and a healthy dividend. But is the company best-of-breed? Historical Operating Results (click to enlarge) What should jump out at investors first is the growth in non-utility revenue. Long-term investors likely first entered the company for the stable income stream from the Utility business but the company has increasingly diversified its revenue base. The Non-Utility Revenue segment derives its income from a handful of operating subsidiary companies (NPL Construction, Link-Line Contractors, W.S. Nicholls Construction, and Brigadier Pipelines) that are broadly referred to as the Centuri segment. Through these subsidiaries, Southwest Energy primarily serves the hook-up needs of other energy service companies (for instance, planning and installing the natural gas lines for a new residential community). This part of the business is geographically-diversified, serving customers across the United States and parts of Canada. Unlike some utilities that run such businesses, parent company Southwest Energy is not responsible for a large portion of these revenues, making up only 12% of Centuri revenue in fiscal 2014. Given the relatively weak economic outlook for Nevada and Arizona (unemployment and net population growth remain stubbornly weak compared to national averages), it is likely that future revenue growth will likely come from this segment outside of years that see exceptional weather-related demand for natural gas. So while this operating segment is still a small contributor to profits (13% of net income in 2014), investors would be wise to keep an eye out for continued growth here. Due to recent acquisitions and solid organic growth, revenue in 2015 from this segment is set to touch $1B, a year/year revenue increase of 35%. Also of note is that Southwest Gas has been significantly increasing its investments in its business in relations to maintenance. There have been stronger scrutiny lately at a both a state and federal level relating to pipeline safety and system reliability which has led the company to significantly increase investment from 2010 levels. Contributing to this ramp-up in spending is the pending filing for a rate increase in Arizona in 2016. Accelerated capital expenditures leading into a rate increase filing is fairly commonplace within the utility industry so that the company can note the increased capital expenditure costs prior to filing. Thus, this trend isn’t changing anytime soon so don’t expect significant improvement on this line item in 2015 or 2016. The Dividend The company currently yields approximately 3% on a 50% payout ratio. This gives the company plenty of room to raise the dividend more in-line with the peer average (60-70%), which is management’s target. With a three-year dividend growth rate of over 10% currently and no slowdown expected, I think it is likely we will see the dividend growth stick to that level at a bare minimum, with annual increases averaging 12% over the next three years more likely. As with all dividend investments, I urge long-term dividend investors to look forward ten years from now or further in their planning. So while shares might not be sporting the yield of utility stalwarts like Duke Energy (NYSE: DUK ) currently, Duke has only increased the dividend 2% a year on average for the past three/five years and that is unlikely to change. Investing in a smaller company with growth ahead of it like Southwest may allow you to see your yield on cost pass Duke Energy’s in the long run. Compounding returns and accelerated dividend increases can close that gap much quicker than you may think. Conclusion At the moment, this is a long-term play. I wouldn’t buy the company for the yield today, but I certainly would consider buying it for the returns I would likely receive on my investment ten years from now. While the American Southwest is not my preferred investment region in North America, it is my second favorite. The company’s primary markets have had a tough time of it coming out of the recession, and while that story is unlikely to change short-term, I do think there will be outsized improvement here in the coming years. The Southwest remains a long-term favorite of Americans seeking lower cost-of-living and the job market has begun to show some green shoots of improvements. Broadly, my investment decisions assume continued population loss from the Northeast and Western regions and a move to the Southwest and Southeast, a trend that is solidly anchored in recent and projected data. As such, I think this is a solid play for dividend investors and the current price of about $72/share, like many utilities, represents a significant discount to what investors were paying mere months before. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Southwest Energy – Strong Dividend Payer For The Long Term

Summary Arizona/Nevada are currently weak markets but will marginally outperform long-term. The Non-Utility business is incredibly strong and provides some geographically-diversified earnings. Expect the dividend to be increased aggressively in the coming years, growing into a more healthy yield. Southwest Energy (NYSE: SWX ) is engaged in the business of purchasing, distributing, and transporting natural gas for customers in portions of Arizona, Nevada, and California. Arizona and Nevada are the primary markets for Southwest Energy, where the company operates as the largest supplier of natural gas to residential consumers and businesses. While the business model may seem simple (buying gas and transporting to the end customer) the reality is the company must operate an intricate network of transmission mains, peak shaving/storage stations, and a web of pipelines to get natural gas from point A to point B efficiently. As you may expect, businesses like Southwest Energy are regulated by state authorities much in the same way power-generating utilities are. Like other utilities, Southwest Energy offers a safe, predictable stream of cash flow and a healthy dividend. But is the company best-of-breed? Historical Operating Results (click to enlarge) What should jump out at investors first is the growth in non-utility revenue. Long-term investors likely first entered the company for the stable income stream from the Utility business but the company has increasingly diversified its revenue base. The Non-Utility Revenue segment derives its income from a handful of operating subsidiary companies (NPL Construction, Link-Line Contractors, W.S. Nicholls Construction, and Brigadier Pipelines) that are broadly referred to as the Centuri segment. Through these subsidiaries, Southwest Energy primarily serves the hook-up needs of other energy service companies (for instance, planning and installing the natural gas lines for a new residential community). This part of the business is geographically-diversified, serving customers across the United States and parts of Canada. Unlike some utilities that run such businesses, parent company Southwest Energy is not responsible for a large portion of these revenues, making up only 12% of Centuri revenue in fiscal 2014. Given the relatively weak economic outlook for Nevada and Arizona (unemployment and net population growth remain stubbornly weak compared to national averages), it is likely that future revenue growth will likely come from this segment outside of years that see exceptional weather-related demand for natural gas. So while this operating segment is still a small contributor to profits (13% of net income in 2014), investors would be wise to keep an eye out for continued growth here. Due to recent acquisitions and solid organic growth, revenue in 2015 from this segment is set to touch $1B, a year/year revenue increase of 35%. Also of note is that Southwest Energy has been significantly increasing its investments in its business in relations to maintenance. There have been stronger scrutiny lately at a both a state and federal level relating to pipeline safety and system reliability which has led the company to significantly increase investment from 2010 levels. Contributing to this ramp-up in spending is the pending filing for a rate increase in Arizona in 2016. Accelerated capital expenditures leading into a rate increase filing is fairly commonplace within the utility industry so that the company can note the increased capital expenditure costs prior to filing. Thus, this trend isn’t changing anytime soon so don’t expect significant improvement on this line item in 2015 or 2016. The Dividend The company currently yields approximately 3% on a 50% payout ratio. This gives the company plenty of room to raise the dividend more in-line with the peer average (60-70%), which is management’s target. With a three-year dividend growth rate of over 10% currently and no slowdown expected, I think it is likely we will see the dividend growth stick to that level at a bare minimum, with annual increases averaging 12% over the next three years more likely. As with all dividend investments, I urge long-term dividend investors to look forward ten years from now or further in their planning. So while shares might not be sporting the yield of utility stalwarts like Duke Energy (NYSE: DUK ) currently, Duke has only increased the dividend 2% a year on average for the past three/five years and that is unlikely to change. Investing in a smaller company with growth ahead of it like Southwest may allow you to see your yield on cost pass Duke Energy’s in the long run. Compounding returns and accelerated dividend increases can close that gap much quicker than you may think. Conclusion At the moment, this is a long-term play. I wouldn’t buy the company for the yield today, but I certainly would consider buying it for the returns I would likely receive on my investment ten years from now. While the American Southwest is not my preferred investment region in North America, it is my second favorite. The company’s primary markets have had a tough time of it coming out of the recession, and while that story is unlikely to change short-term, I do think there will be outsized improvement here in the coming years. The Southwest remains a long-term favorite of Americans seeking lower cost-of-living and the job market has begun to show some green shoots of improvements. Broadly, my investment decisions assume continued population loss from the Northeast and Western regions and a move to the Southwest and Southeast, a trend that is solidly anchored in recent and projected data. As such, I think this is a solid play for dividend investors and the current price of about $72/share, like many utilities, represents a significant discount to what investors were paying mere months before. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.