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Southern Company’s Dividend Profile Compared to Its Peers

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Southern Company (SO), the top regulated utility, declared a quarterly dividend of $0.62 per share on Monday. The dividend is in line with the previous quarterly dividend. The dividend will be paid to the shareholders on record as of Friday. Southern Company has one of the longest dividend payment histories among its peers, which indicates stability. The company has been paying a quarterly dividend for more than 70 years. Southern Company has increased its dividend for 18 consecutive years. The company expects to pay a dividend of $2.46 per share in 2019, which is approximately 3% higher than in 2018.

Southern Company’s superior dividend yield

Currently, Southern Company is trading at a dividend yield of 4.4%, which is higher than broader utilities’ average yield of 3.1%. For the last few years, the company’s yield has been higher than the peer average.

While Southern Company’s dividend yield is higher than many of its peers, the company lags its peers in terms of dividend growth. Southern Company’s dividend per share rose 3.4% compounded annually in the last five years. Utilities at large raised their dividends ~4% during the same period.

Peer comparison

NextEra Energy (NEE), the biggest constituent of the Utilities ETF (XLU), is trading at a yield of 2.4%, which is lower than the peer average. On the positive side, NextEra Energy’s dividends increased more than 10% compounded annually in the last five years. Duke Energy (DUK), the second-largest utility stock by market cap, yields 4.1%. Duke Energy’s dividends increased around 3% compounded annually in the last five years.

Southern Company gave an earnings guidance of $2.98–$3.10 per share for 2019. The guidance implies an expected payout ratio of 81% for the current year, which is higher than the company’s peers. Duke Energy’s payout ratio is expected to be close to 75% in 2019.

Southern Company stock has been on a solid uptrend this year. So far, the stock has risen approximately 30%. In comparison, XLU has risen about 15% during the same period.

Are these dividends sustainable?

Southern Company’s free cash flow trends might bother investors. The utility has been generating negative free cash flows for the last several quarters. The trend impacted the sector. Free cash flow is the difference between cash from operations and capital expenses. Free cash flow is used for expansion and dividend payments. Capital expenditure kept increasing, while cash from operations dwindled in the last few years due to energy efficiency programs.

To learn more, read Top Utilities Fell, Treasury Yields Rose Last Week.

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