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Southern Company's Struggle: An Investor's Pespective

PART:
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Part 4
Southern Company's Struggle: An Investor's Pespective PART 4 OF 7

Southern Company’s Dividend: Can We Expect a Modest Hike?

Southern Company’s dividends

Southern Company’s (SO) dividend increase may be just a few days away, as the company generally announces a dividend hike around this time of the year. In 1Q17, SO paid a quarterly dividend of $0.56 per share. Southern Company expects its dividend to rise ~4% for the next few years, while Wall Street analysts forecast that SO will pay a dividend of $0.58 per share in 2Q17.

SO is one of the highest-yielding utilities in the US. It’s now trading at a dividend yield of 4.5%, while the utility (XLU) average yield stands at ~3.5%.

Southern Company&#8217;s Dividend: Can We Expect a Modest Hike?

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To be sure, very few utilities are trading at such a premium yield. FirstEnergy (FE) is trading at a yield of 4.7%, while Duke Energy (DUK) is trading at a yield of 4.5%. Currently, SPDR S&P 500 ETF’s (SPY) (SPX-INDEX) yield is ~2%.

Notably, the utility sector makes up nearly 3.2% of SPY, and SO accounts for more than 7.6% of XLU.

SO’s tiny dividend growth

Although Southern Company’s yield is one of the highest, its dividend growth rate has been primarily on the lower side of the industry average. In the past five years, the company has raised its dividends by 3.6%, compounded annually.

By comparison, NextEra Energy (NEE) raised its dividend ~10% during the same period, while Dominion Resources’ dividend growth rate over the past five years has stayed above 7%.

To be sure, Southern Company has a strong history of paying dividends. It has paid increasing dividends for the past 15 consecutive years. But remember, utilities (XLU) generally pay higher dividends because they pay large portions of their earnings to shareholders. Southern Company, for example, paid 83% of its earnings as dividends in 2016.

By comparison, NextEra Energy’s (NEE) payout ratio stands near 53%, while Duke Energy’s ratio is near 83%.

In the next part, we’ll compare total returns.

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