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With a market cap of $57 billion, Southern Company (NYSE: SO) is easily one of the largest utility companies in the United States. Meanwhile, its roughly 4.4% yield is toward the high end of its peer group and backed by a 19-year history of annual dividend increases. Even more impressive, the dividend has been maintained or increased for an incredible 71 years.
So far, Southern looks pretty interesting, but don't jump in too fast -- there's more you need to know.
A great run
Those dividend stats should be pretty alluring to income-focused investors. But so far in 2019, shares are up a massive 25%. That beats the S&P 500 Index's 19% gain and is way more than the average utility advance, as measured by Vanguard Utility ETF, of 14%. What's going on?
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The big story here is that Southern has been struggling to get a massive capital project across the finish line. It hasn't been pretty, with the Vogtle nuclear investment years behind schedule and massively over budget. In fact, it wasn't too long ago that the entire project was close to being scrapped because the company's contractor, Westinghouse, declared bankruptcy.
Southern, however, stepped in and took control of the project. It has also agreed to backstop any future cost overruns. It is heavily incentivized to execute, here. Based on Vogtle's history, though, investors justifiably took a "show me" attitude, leaving Southern looking cheap for a long time. However, recent earnings releases have contained lots of good news about the progress of the Vogtle build. Meanwhile, nuclear projects in China have successfully started up using the same technology that Southern is putting in place, further improving the outlook for Vogtle.
Although the Vogtle project will last through 2022, and the first of the two units on the site won't come on line until 2021, investors are starting to believe that Southern will succeed where Westinghouse failed. And, thus, the stock has had a great run.
Maybe not the best deal today
The improved expectations for Southern have come at a time when investors have been shifting toward utility stocks because of concerns about a stock market downturn. The necessary nature of electricity and natural gas, and government regulation of the industry, tend to lead to pretty steady financial performance at utilities in both good and bad markets. Over the past year, the S&P is up around 6%, with the broader utility group up 15% and Southern up 16%. So, the outperformance so far this year isn't totally out of line with the utility group over the longer term, and it could even be viewed as Southern making up some lost ground.