SO: Ex-Dividend Stock to Watch

With the recent market declines and volatility spiking up, many of you out there have cash in hand ready to put to work, but may be wondering where to put it. I am here today in another episode of "Ex-Dividend Stock to Watch", my weekly series that presents what I believe to be a good opportunity in the market that also is going ex-dividend in the upcoming week. What is this weeks pick:

The Southern Company (SO)

Southern Co is an electricity generating company that distributes electricity and natural gas to approximately 9 million customers in nine states. It provides services in few of the Southeastern states. It also owns about 50 GW of generating capacity.
--taken from www.gurufocus.com

 

VALUATION

When looking at the valuation it is pretty clear that it presents a very interesting buying opportunity right now. Currently I believe that it is about 15% undervalued and if you look at the technical chart you can see that it may have put in (or is near) a bottom. There has been a recent sell-off (December) that has led to an opportunity to add a solid company to your portfolio. This, coupled with the overall decline in the Utilities sector, means that the potential for an even larger gain than I am projecting is very possible.

 

THE GOOD

When you typically look at taking a position in a utility you look for stability and a dividend that not only will pay nicely, but also will grow. The history for SO here is nothing but outstanding. The current yield stands at over 5% and it has 16 years of consecutive growth. While the growth isn't outstanding, with a 10 year average of 3.8%, it does beat the average inflation rate over the same period. This means that your investment that paid you $0.34 per share in 2002, now pays $0.54 per share. That is a very nice 58% increase!

 

the bad

It really has become nuclear now with SO. The nuclear power plant that they have been working on in Georgia is now set to be completed in 2022,  which for those of you that are counting, is over 5 years late from the original estimate. The good news is that the project is going forward, the bad news is that the funding from the taxpayers was cut by about 1.7 billion. SO also estimates that new penalties for delays will cost shareholders about $750 million through November 2022. This project has been completely mismanaged and even with the go ahead there are no guarantees that it will be completed on time, or ever.

 

the ugly

So debt is increasing, projects aren't getting done, and now there are penalties that are going to possibly have effects on the future EPS? What could be worse than that? 

Well how about belonging to a sector that may falter as the interest rates begin to increase. The utility sector is already getting hit pretty hard, and since December the S&P Utilities has fallen  about 13% while the S&P as a whole has been cranking upward.

Will this continue to follow the higher interest, lower the utilities trend? Only time will tell but I probably wouldn't bet on a resurgence of utilities if we see yields above 3% on bonds.

 

conclusion

Wow, there sure is a lot going on with The Southern Company and I didn't even mention the potential Senate tax credit cut/extension for nuclear power in 2020. This is getting voted on soon and could be a huge head or tail wind for a company like SO that doesn't have reactors ready to go until 2021. While there are a slew of potential risks and the future is looking uncertain on many, many points I am still a fan of SO. 

Right now it looks like a potential bargain with over a 5% yield, 16 years of consecutive growth, and a payout ratio that is actually in line with the industry. Yes there are things that I am worried about but guess what? So is the market! That is why I like SO, because there is a lot of potential for a deep value play at this time.