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I Own Southern Company And AGL Resources – Now What Do I Do?

Summary The utility stocks Southern Company and AGL Resources are low growth, high yield investments. Southern Company is buying AGL Resources – I own both. What does the transaction mean to shareholders of both companies? This article reviews the transaction as it relates to shareholders going forward. Introduction Utility stocks are generally low-growth high-yield investments. As I will soon illustrate, both Southern Company (NYSE: SO ) and AGL Resources Inc. (NYSE: GAS ) neatly fall into that category. These low growth and above average dividend yield characteristics have led me to only invest in utility stocks when two important conditions are met. First and foremost, when considering utility stocks, I am even more of a stickler for fair valuation. My logic is simple; since long-term historic and future prospects for growth are low, I consider it imperative to only invest when utility stocks can be bought at fair value or below. There is typically not enough growth available to produce an attractive enough total return if you overpay even slightly. With most utilities, the dividends are consistent, but also grow at low rates in conjunction with the utility’s earnings growth. Second, I like to utilize utility stocks when current and dependable income is my primary investment objective. Although many utility stocks can be classified as dividend growth stocks, I tend to like them more for current income than total return. However, when purchased at or below sound valuation, investments in utility stocks can produce acceptable levels of long-term total return. On the other hand, when investing at sound valuations, utility stocks do tend to produce significantly more cumulative dividend income than the average company. As the following two announcements and reports indicate, Southern Company will become the second-largest utility company in the U.S. by customer base after buying AGL Resources. Importantly, Southern Company’s management expects the transaction to accelerate earnings growth in the first full year from its traditional 2% to 3% rate to a higher but still moderate 4% to 5% earnings growth rate. “Southern Co. to buy AGL Resources in $12B deal Aug 24 2015, 07:49 ET | By: Carl Surran , SA News Editor Southern Company (SO) agrees to acquire AGL Resources (GAS) for $66/share in cash, a 38% premium over Friday’s closing price, in a deal with an enterprise value of ~$12B including debt. SO says the deal will create the second-largest utility company in the U.S. by customer base, with 11 regulated electric and natural gas distribution companies providing service to ~9M customers with a projected regulated rate base of ~$50B. SO expects the deal to increase EPS in the first full year after the close and drive long-term EPS growth to 4%-5%” ” MARKET PULSE Southern Co. agrees to buy AGL Resources in $12 billion deal Published: Aug 24, 2015 7:41 a.m. ET By Ciara Linnane CORPORATE NEWS EDITOR Shares of AGL Resources Inc. GAS, +28.52% surged almost 9% in premarket trade Monday, after Southern Co. SO, -3.14% said it has agreed to buy AGL in a deal with an enterprise value of about $12 billion. Southern Co. said it expects the deal to boost earnings per share in the first full year after the close, and to drive long-term EPS growth to 4% to 5%. AGL will become a wholly owned unit of Southern Co., creating the second-biggest utility in the U.S. by customer base. AGL shareholders will receive $66 in cash for each share, a premium of 36.3% over the volume-weighted average stock price over the last 20 trading days through Aug. 21. We believe the addition of AGL Resources to our business will better position Southern Company to play offense in supporting America’s energy future through additional natural gas infrastructure,” Chief Executive Thomas Fanning said in a statement. The deal is expected to close in the second half of 2016. Southern Co. shares were up slightly in premarket trade, but are down 6.7% in the year so far, while the S&P 500 has lost 4.3%.” Here is a link to a report on Reuters that outlines the deal: The Southern Company Purchase of AGL Resources by the Numbers As a shareholder of both Southern Company and AGL Resources, I immediately wanted to know what I might expect from this transaction. In other words, does the deal make economic sense and will it benefit shareholders over the long run? Therefore, I looked at the deal through the lens of the F.A.S.T. Graphs fundamentals analyzer software tool and the FUN Graphs (fundamental underlying numbers) in order to evaluate the value to me as a Southern Company and AGL Resources shareholder. From The Perspective of an AGL Shareholder I was quite content with my position in AGL Resources as I considered the company fairly valued with a blended P/E ratio of 14.3 and I appreciated the 4.3% dividend yield. Additionally, since my cost basis was approximately 39, I was enjoying a reasonable level of capital appreciation coupled with its current above-average yield that had been growing at about 2½% to 3% per annum. The following earnings and price correlated graph illustrates my contentment. (click to enlarge) Of course, the approximate 30% premium over fair value significantly improves the total return I will receive when the transaction is complete. Therefore, from the perspective of an AGL Resources’ shareholder, I am quite pleased with the windfall. The following forecasting calculator on the day of the announcement and based on AGL Resources’ expected midterm future earnings growth illustrates the premium that Southern Company is paying. (click to enlarge) This is what the same graph looks like as of 8/24/2015, which shows the premium price that Southern Company is paying for AGL Resources. This would indicate that technically speaking AGL Resources has become overvalued as a result of the premium paid by Southern Company. (click to enlarge) On the other hand, when looked at from the perspective of expected future cash flows, the premium price that Southern Company is allegedly paying does not look so enticing. Cash flows are expected to increase significantly this fiscal year. Therefore, on the basis of price to cash flow, the apparent premium that Southern Company is paying based on earnings, looks like a bargain based on cash flows. (click to enlarge) When reviewing the cash flow per quarter growth (cflq) that AGL Resources has generated thus far in fiscal 2015, those fiscal year 2015 cash flow projections appear to be on track. So now, I am partially conflicted. I like the premium market valuation, but I’m not so sure that I’m truly receiving a premium price for my AGL shares based on potential cash flow growth. I have circled the last three quarters of cash flow highlighting the cash flow growth over the last three quarters. (click to enlarge) Furthermore, when I evaluate AGL’s historical annual dividends paid per share (dvpps) coverage based on cash flows per share (cflps) I am confident that my dividend was secure. Of course, I am even more confident considering the recent quarterly cash flow growth presented above. (click to enlarge) Furthermore, upon reviewing other valuation ratios, it appears that Southern Company instituted the transaction when AGL’s price to sales (ps) was at reasonable levels. However, the premium price they had to pay is common when a company is purchased outright. (click to enlarge) Additionally, AGL’s price-to-book value (PB) at the time the transaction was initiated was within historical norms as well (the red line). (click to enlarge) The bottom line is that as an AGL shareholder I have mixed views about the transaction. I like the premium market valuation, but I was also content to continue holding my AGL shares for the high yield they were providing. From The Perspective of a Southern Company Shareholder The following long-term earnings and price correlated graph on Southern Company supports my contentment as a shareholder. Although my cost basis in Southern Company was approximately at the same level that the company was trading at prior to the announcement, I was quite happy with my 4.7% dividend yield and believed that the company was fairly valued. Consequently, I was committed to continuing to own this high-quality utility company for many years to come. Moreover, even the approximate 5% price drop as a result of the transaction did not concern me very much because I felt the dividend was secure, above average, and had the potential for a modest amount of future growth. However, I was now faced with the issue of whether my Southern Company investment would continue to make sense after they purchased AGL. (click to enlarge) At this point, I decided that I would give credit to management’s assertion that the transaction would in fact accelerate Southern Company’s future earnings, and therefore, along with it – future dividend growth. Therefore, I reviewed the Forecasting Calculator based on consensus estimates from S&P Capital IQ prior to the AGL transaction. Here I discovered that consensus expected Southern Company’s earnings to grow at a very modest rate of 2.7%. Based on those consensus estimates and assuming that Southern Company would trade at a reasonable P/E ratio of 15 out to fiscal year-end 2018, I came up with a total annual rate of return expectation of 5.22%. Of course, that is nothing to write home about as it only represented capital appreciation of $.85. On the other hand, the $7.70 of projected dividend income was very attractive considering today’s low level of interest rates. Clearly, this is purely an income play and I had no delusions of anything different. (click to enlarge) This is what the expected returns look like after Southern Company’s price drop as a result of the announcement. The announcement brought Southern Company’s stock price into better alignment with fair value. (click to enlarge) For additional insight, I felt the forecasts prior to the transaction announcement were reasonably reliable considering the historical record of analysts forecasting Southern Company’s earnings. As the following analyst scorecard indicates, when making 1-year forward and 2-year forward estimates since calendar year 2000, the record of analysts following Southern Company has been consistently accurate at over 93%. (click to enlarge) Then I ran a similar calculation using the custom Forecasting Calculator based on management’s expectation of earnings growth accelerating to between 4% and 5% as a result of the transaction. I split the difference and ran a calculation based on Southern Company’s 5% drop in price and a forecast 4.5% growth rate. Based on those calculations, I was pleased that my Southern Company investment offered the potential for significantly more capital appreciation of approximately $11.11 versus the $.85 based on growth prior to the transaction. However, I was even more pleased to discover that my dividend income of $13.19 would be close to double what I expected prior to the transaction. Note: all these calculations are made and based on purchasing one share of the stock. The bottom line is that I have concluded that my Southern Company investment holds the potential to be much more attractive after the AGL transaction than it was prior to it. (click to enlarge) As a bonus , I have prepared a free analyze-out-loud video on my website MisterValuation which provides a more in-depth and detailed look at the Southern Company and AGL Resources transaction. Summary and Conclusions From the perspective of a Southern Company shareholder based solely on the numbers, I am enthusiastic and pleased with the AGL transaction. From the perspective of an AGL shareholder, I am disappointed that I will lose the company as a separate holding, but pleased that I will still benefit from its potential as a Southern Company shareholder. Of course, the premium over current market price is also a plus. However, I am now also faced with the challenge of what I will do with the proceeds received from the AGL shares. At this point, I am not yet certain whether I would reinvest the proceeds into Southern Company, or look for another opportunity. However, I have time to assess the situation. Disclosure: Long GAS, SO at the time of writing. Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation. Disclosure: I am/we are long GAS,SO. (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.

Nasdaq Dividend Achievers: Southern Company

Summary Does Southern Company’s low volatility and high yield make up for its sluggish growth? See Southern Company’s impressive dividend history and competitive advantage analyzed. Southern Company makes a compelling investment case for risk-averse income-oriented investors. Southern Company (NYSE: SO ) is the third-largest publicly traded electric utility based on market cap. The company’s market cap of $40 billion is not far off from the only two larger electric utilities; Dominion Resources (NYSE: D ) with a market cap of $41 billion, and NextEra Energy (NYSE: NEE ) with a market cap of $45 billion. Southern Company supplies electricity to 4.5 million customers in Georgia, Alabama, Mississippi, and Florida. Southern Company is a member of the Dividend Achievers Index. Southern Company has paid steady or increasing dividends since at least 1982. The company has been paying dividends every quarter since 1948; one of the longer active streaks. The Dividend Achievers Index is comprised of businesses with 10 or more consecutive years of dividend payments. You can see the current list of all 238 members of the Dividend Achievers Index here . This article will look at Southern Company’s current events, competitive advantage, and future growth prospects. The company will be examined using The 8 Rules of Dividend Investing . The 8 Rules of Dividend Investing take a systematic approach to building a high quality dividend growth portfolio. Business Overview Southern Company generates 91% of its earnings from heavily regulated traditional utility businesses. The company generates the remaining 9% of earnings from its competitive wholesale electric business. Southern Company’s operations consist of the following subsidiaries and affiliates: Alabama Power Georgia Power Gulf Power Mississippi Power Southern Power Southern Nuclear SouthernLINC Wireless The company generates electricity through a variety of assets located throughout the South East, South, and South West United States. The image below shows the company’s electricity generating assets. (click to enlarge) Source: Southern Company March 2015 Business Overview Presentation Competitive Advantage Southern Company’s competitive advantage comes from its monopoly electricity provider status in the markets it serves. Electric utilities are natural monopolies due to the high cost of building power plants and the impracticality of moving your entire life because you don’t like your electricity provider. Southern Company is one of the largest publicly traded electricity companies. It has a long history of growth thanks to population growth and the controlled and highly regulated utilities market in the United States. The company’s strong competitive advantage virtually ensures slow and steady growth for years to come. Current Events & Growth Prospects Southern Company has experienced 2 recent setbacks. The company is building a coal gasification plant in Mississippi. The plant was originally expected to go online in May of 2014. 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. The second setback for Southern Company is the ongoing delays in the two Vogtle nuclear plants. The contractor building the plants has stated that the construction completion date has been delayed by 18 months for each plant. Every month of delay will cost Southern Company an extra $40 million. The full 18-month delay is expected to cost over $700 million. Despite these setbacks, Southern Company is projected to grow earnings per share between 3% and 4% a year in 2015. This is a reasonable long-term earnings per share growth rate for the company. The GDP in the area is expected to grow at 3% in 2015, and Southern Company should match or slightly exceed this growth. As with most utilities, investors should not expect rapid growth from Southern Company. Total return should be between 7.7% and 8.7% from growth (3% to 4%) and dividends (4.7%). Recession Performance As one would expect from an electric utility, Southern Company’s operations were largely unaffected by the Great Recession of 2007 to 2009. The company’s earnings per share through the Great Recession and subsequent recovery are shown below to drive home this point: 2007: EPS of $2.28 2008: EPS of $2.25 2009: EPS of $2.32 2010: EPS of $2.36 2011: EPS of $2.55 The 8 Rules of Dividend Investing The sections below will compare Southern Company to other businesses with a long history of dividend increases using the 5 Buy Rules from The 8 Rules of Dividend Investing . Each rule has a short “why it matters” section, explaining why the rule is relevant. Rule 1: 25+ Years of Dividends Without A Reduction Southern Company has paid steady or increasing dividends since at least 1982 (when Yahoo Finance dividend data first starts). The company has paid regular dividends since 1948 and easily passes the first rule of dividend investing. Why it matters: The Dividend Aristocrats (stocks with 25+ years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year. Source: S&P 500 Dividend Aristocrats Factsheet Rule 2: Dividend Yield Southern Company has an extremely high dividend yield of 4.7%. The company has the eighth-highest dividend yield out of 156 stocks with 25+ years of dividend payments without a reduction. Southern Company’s high dividend yield should be especially appealing to income-oriented investors. Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013. Source: Dividends: A Review of Historical Returns Rule 3: Payout Ratio Using adjusted earnings, Southern Company has a high payout ratio of 75%. The company’s extremely stable cash flows mitigate the risk of Southern Company reducing its dividend payments, however. Still, investors should not expect dividend growth ahead of earnings-per-share growth due to the company’s high payout ratio. Southern Company has the 144th lowest payout ratio out of 156 stocks with long dividend histories. Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006. Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3 Rule 4: Long-Term Growth Rate Southern Company has grown its dividend payments at 6.9% a year over the last decade. This growth will slow going forward. Management is projecting a target of 3% to 4% earnings-per-share growth going forward. As discussed in the growth section above, this number is a fair growth estimate for the company. With an expected growth rate of 3.5%, Southern Company has the 102nd highest growth rate out of 156 stocks with 25+ years of dividend payments without a reduction. Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013. Source: Rising Dividends Fund, Oppenheimer, page 4 Rule 5: Long-Term Volatility Southern Company has an exceptionally low stock price standard deviation of just 16.85%. This is the third-lowest in the entire Sure Dividend database, behind only Consolidated Edison (NYSE: ED ) and Johnson & Johnson (NYSE: JNJ ). Southern Company’s extremely low stock price volatility should appeal to risk-averse investors. Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30, 2011. Source: Low & Slow Could Win the Race Final Thoughts With an expected total return of around 8.2% from dividends (4.7%) and growth (3.5%), Southern Company offers investors decent total return potential. The company shines with its extremely low stock price volatility. Southern Company’s combination of high yield and low volatility carries it into the top 20% of stocks using The 8 Rules of Dividend Investing . The company should appeal to investors looking for low risk, high income, and slow but steady growth. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Is This The End Of Nuclear?

Cost overruns are causing problems for utilities committed to nuclear power. Solar costs are falling and should go below those of nuclear by 2025. Long-term uncertainty is already causing pain among suppliers to the nuclear sector. Without a lot of fanfare the sunset of the nuclear power era seems to be approaching. One news peg here comes from France, the most nuclear-dependent country around, where Areva ( OTCPK:ARVCF ) is buckling after announcing a 4.8 billion Euro ($5.3 billion) loss. Delays in building a Finnish power plant are blamed, and the French government (which holds an 87% stake) wants its biggest company, the utility EDF, to step into the breach. That’s not how we roll in the U.S., but U.S. utilities tied to nuclear power are also dealing with delays and overruns over nuclear reactors. Southern Co. (NYSE: SO ) thinks a three-year delay at its Plant Vogtle could cost $8 billion and Southern wants to claw back $240 million from its suppliers, Westinghouse Electric ( OTCPK:TOSYY ) and Chicago Bridge & Iron (NYSE: CBI ). The plants were supposed to go online in 2016 and 2017. Now 2019 and 2020 look more like it. Southern CEO Thomas Fanning continues to make happy talk, calling nuclear economics “compelling,” but Wall Street is starting to back away slowly. Even China is starting to back away. This is reflected in Southern’s recent price action. All utility stocks have been falling recently as interest rates rise, making their yields look less attractive. But over the last 12 months XLU (NYSEARCA: XLU ), an ETF tracking the sector, is up 10.5%. Southern, meanwhile, is up only 6.5%, and since the sector’s fortunes peaked in late January it’s down almost 14%. Contrast that with the performance of Pacific Gas & Electric (NYSE: PCG ), which uses a lot of solar power in California, up 22% over the last year and down less than 8% from its peak. (XLU is down 9% from the peak.) Southern’s nuclear “running mate” is South Carolina’s SCANA (NYSE: SCG ), which owns 55% of a nuclear facility near Jenkinsville, whose construction is now being inspected by the Nuclear Regulatory Commission, creating delays. Its partner in that project has had to go to the market for another $1.2 billion in bonds and while the Department of Energy has recently opened up $12.5 billion in loans for nuclear projects, congressional critics are getting their knives out. Can a cry of “nuclear Solyndra” be far behind? While the long-term costs of nuclear power still appear attractive – the industry estimates them at just 2.4 cents per kilowatt-hour — their advantage over natural gas continues to decline, and the cost of new facilities continues to rise. Nuclear plants suffer from the “bathtub problem” — risks are great at the start and end of a plant’s useful life, and that’s where many plants are today. Meanwhile, costs for renewable energy, like wind and solar, continue to fall like a knife. All-in costs for a solar installation are estimated to fall below those of other power sources by 2025. If you bid out a solar plant against a nuclear plant today, in other words, the nuclear plant will win. But what if you do the same exercise in two years? Or four? Or 10? You can re-allocate capital from solar in 10 years if you’re wrong. If you make the wrong decision on nuclear, on the other hand, you’re committed. Because nuclear plants have to be calculated over generational time frames, and financed over those time frames, uncertainty is rising, and uncertainty is the enemy of a positive decision. Deutsche Bank now predicts solar will become the “dominant” form of electricity generation by 2030 — in nuclear power time frames that’s next week. What happens when Southern Co. wakes up in 10 years and sees that solar or wind is substantially cheaper than the nuclear energy its bondholders are on the hook for over the next 20 years? That’s a nightmare no other utility executive wants to visit. That is what’s causing the sunset of nuclear power. Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.