Southern shares unlikely to head far south

This steady and reliable utility may be the best managed in the country.

By TheStockAdvisors Jun 28, 2013 1:38PM
Digital VisionBy Jack Adamo, Insiders Plus

Over the years we've made nice profits in the electric and gas utility, Southern Company (SO). My one regret is that I didn't simply hold it; we'd have made more money. I'm not going to make that mistake again.

Southern is probably the best-managed utility in the country. Return on equity last year was 12.4%, which is above the typical 10% rate for utilities. Accomplishing this within a regulated framework is no mean feat.

Southern's operations are centered in Alabama, Georgia and Mississippi. Last year it got 85% of its revenues from regulated businesses, primarily electricity distribution. I like this strong emphasis on the regulated distribution sector; it is steady and reliable.

Southern is exceptionally well-capitalized. It has one of the lowest debt-to-equity ratios in the industry, and one of the highest credit ratings. Its debt is rated investment grade by all the rating agencies.

Its interest coverage last year was greater than five times operating income, and cash flow from operations was more than twice reported income. That is a typical year for Southern.

The stock has had a good run in the last couple of years, as investors seek safer income. However, it has pulled back lately. Investors fear inflation will kick in, driving up interest rates. That can be bad for utilities, since it raises their borrowing costs, and makes bonds a more competitive source of income.

While those are factors to be considered, I'm not overly concerned about them. Southern has risen six-fold over the last twenty years, and with admirable consistency.

Although you'll never get Apple-like returns from a regulated utility, you have someone watching your back on the downside. Regulated utilities get rate relief on unavoidable costs, supporting their need to achieve a reasonable return on investment.

Given our overall market caution, we're not going to load up on the stock at this point. We'll start small, and hope to add to it at lower prices, should they become available this summer. Right now the shares yield 4.5%.

The dividend growth rate has been 3.8% compounded for the last five years. Assuming it can keep that up, it should help mitigate the effects of inflation.

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