Southern Company Offers Growth, Income, and Safety
In a slow-growth world with good potential for rising price inflation and interest rates, Southern Co (NYSE:SO) stock offers a great defense for a stock market that’s already gone up.
These days, with U.S. multinationals struggling to provide top-line growth, a solid domestic income play is a welcome addition to an investment-grade portfolio.
Dividends matter in a world with low expectations and they matter even more with a stock market that’s already appreciated tremendously due to extreme monetary stimulus.
One good utility stock can really help a portfolio balance out investment risk. Often, utilities underperform in a rising rate environment, but it’s early days yet in the new cycle and Southern Co stock is bucking the trend.
Southern Company is based in Atlanta, serving 4.5 million customers in four states, with approximately 46,000 megawatts of generating capacity and fiber optic and wireless communication services.
Despite a very warm December, the utility stock produced 2015 fourth-quarter earnings (excluding some after-tax charges) of $403 million, or $0.44 per share, compared to $343 million, or $0.38 per share, in the same year-ago quarter.
Since 2002, Southern Company has been increasing its annual dividend (paid quarterly) at a fairly consistent pace, which is symbolic of the company’s share price performance.
The chart for Southern Co stock is featured below:
Chart courtesy of www.StockCharts.com
Basically, a utility play like this is a defensive portfolio diversification move. It’s also an income producer for those investors wanting a quarterly payout. The stock’s current yield is just over four percent, which is higher than average.
On a long-term basis, Southern Co stock has outperformed a number of its peer components.
What’s important in a stock market that’s already gone up due to unprecedented monetary stimulus is preservation of capital. Given that the broad market indices have already appreciated significantly (since the low of March 2009), it’s reasonable to expect less in terms of capital gains from equities. This, in turn, means that dividend income is an even more important component to a portfolio’s total return.
As well, there are still a tremendous amount of risks faced by equity investors and it’s useful for a portfolio of U.S. equities to have “domestic only” operational exposure. Currency translation is having a material and detrimental effect on U.S. multinationals and this problem is not going away in a rising interest rate environment.
The Bottom Line on Southern Company
Even a growth stock investor can benefit now from some overall risk reduction. A solid utility like Southern Company offers this dynamic.
Dividend income is going to become increasingly important, both for institutional and individual investors. Not only is this a function of an aging investor population desiring more income from their investments, but it is also the result of the current climate being so difficult for big business to grow in.
What large corporations continue to do is hoard cash, keeping a lid on capital expenditures but keeping investors happy with rising dividend payments and share repurchases to pay for the dividends. It’s an operational dynamic that’s worked for a number of years now and I believe it will stay a market trend for years to come as the baby boomers retire.
Southern Company is all about its bottom line—earnings and dividends. If the company can keep on doing what it’s been doing, it should continue to be a good earner for investors.