Southern Company Update, 1st Quarter 2024

Southern Company stock, along with many other utilities, has had a rare, strong rally over the last couple of weeks. Heavy buying in the utilities sector can often be a harbinger for market volatility especially if it comes at the expense of the riskier sectors like consumer discretionary stocks (clothing, vehicles, restaurants, etc.). And that’s pretty much what we’ve seen with the rally beginning April 16. Stocks like LuluLemon, Nike, and Starbucks have sold off while utilities rally in conjunction.

Ultimately, this is all short-term noise for Southern shareholders though. Southern Company recently completed its construction of Vogtle with Unit 4 hitting commercial operation earlier this year. This makes Vogtle the largest generator of clean energy in the United States. Furthermore, nuclear reactors have large, up-front fixed costs but very little on-going variable costs. This means that almost all revenue generated by Vogtle falls straight to the bottom of the income statement as earnings, a boon to shareholders.

Importantly, the board of directors increased the quarterly dividend by $.02 to $.72/share. This matches the long-term dividend growth rate for Southern Company for the last 10 years. The dividend is covered by earnings ($3 billion of yearly dividends paid out from $4.2 billion of yearly net income). Operating cash flow has also hit an all-time high ($8 billion in the last 12 months). Annual capital spending is still very high ($9.6 billion) so free cash flow from operations remains negative and must be funded from debt.

The 3.7% dividend yield is trading well below the historical averages implying that the dividend payout from new Southern Company share ownership is a bit low. However, Southern Company has seen more volatility than most utilities in the time period between 2015 and 2020 including mismanagement of Kemper, Vogtle cost overruns, and Covid. Therefore 3.7% yield might be more reflective of the ongoing post-pandemic norm for Southern Company. This stock is best suited for conservative, income-seeking investors. Assuming the stock price rally does not drive yields below 3%, holders of Southern Company should feel comfortable with their holding.

 

 

 

Sources:

1. FactSet Research Systems. (n.d.). Southern Company (interactive charts). Retrieved May 9, 2024, from FactSet Database.
2. FactSet Research Systems. (n.d.). Southern Company (Company/Security). Retrieved May 9, 2024, from FactSet Database.

 

 

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Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

 

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