Source: Southern Company
did it again. For the third straight quarter, the utility
exceeded earnings expectations. But with a substantial investment
in increasingly archaic coal, is Southern Company as solid as it
seems? Here's what you need to know.
Southern surpassed predictions for both top and bottom line
numbers. On the top, Q2 2014 sales clocked in at $4.47 billion,
well above estimates of $4.27 billion and higher than Q2 2013's
Southern also succeeded in turning those top line sales into
stronger earnings. The company reported adjusted earnings per
) of $0.68, two cents above expectations and four cents above
2013's second quarter.
This is the third consecutive quarter that Southern Company
has exceeded earnings expectations, a welcome respite from three
earnings misses in 2013.
Beyond the numbers
Q2 was a crux point in investors' opinions of utilities. An
extremely cold winter
pushed most utilities' Q1 earnings well beyond expectations,
creating an untimely gap in interpretable and investable
information. With second quarter results in, analysts have been
keen to separate the economic winners from losers -- and Southern
has made the cut for now. Southern Company Chairman, President,
and CEO Thomas Fanning couldn't agree more:
Southern Company's second quarter industrial sales growth is
an indicator of the potential for a broader economic recovery
across the Southeast. Our commitment to provide clean, safe,
reliable and affordable energy has enabled us to continue to
meet the needs of a region that's growing faster than the U.S
as a whole.
For Q2, industrial kilowatt-hour sales jumped a
seasonally-adjusted 3%, with overall electricity sales up 2.1%.
With over 90% of Southern's earnings originating from its four
regulated subsidiaries, electricity usage growth like that is the
envy of every utility.
Source: Southern Company; regulated subsidiaries
Can Southern keep it up?
Q2 2014 was a stellar quarter for Southern Company -- but a good
quarter doesn't dictate long-term success. Looking ahead,
Southern expects to grow both its EPS and dividend at an annual
rate of 3% to 4%. If Q2 is any evidence, growing customer sales
won't be a major problem. But how Southern meets that demand
growth presents another issue entirely.
The company is embarking on an expensive $17 billion capital
expenditure program for the next three years, with projects
ranging from maintenance jobs to environmental spending to power
base load expansion. Unfortunately, around $2.6 billion of this
is slotted to cover unexpectedly high costs for Southern's Kemper
County, Mississippi, clean coal power plant.
Source: Southern Company Overview Presentation
Coal currently accounts for around 38% of Southern's 45,500 MW
of generation capacity, an unsustainably sizable portion for a
fuel that has continually been targeted by new environmental
policy. Southern is planning to drop around 7,500 MW of coal by
2015, but the move may not be enough. A
new EPA Clean Power Plan proposal
further tips the scales of cost competitiveness away from coal,
and investors would do well to keep an eye on this controversial
Do it for the dividend?
Historically, utilities have been some of the safest
around. Southern's 4.7% dividend yield is enough to make most
income investors salivate -- but it's important to look beyond
Increasingly active energy policies, a domestic natural gas
revolution, and a volatile recovering market may mean Southern
Company's solid past is irreflective of its future success.
Southern beat on Q2 earnings -- but its risk factors are all too
real, and there may be better dividend bang for your buck.
Diversify your dividends
The smartest investors know that dividend stocks simply crush
their non-dividend paying counterparts over the long term, but
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Southern Company Earnings: Will Coal Kill This
Dividend Stock's Success Story?
originally appeared on Fool.com.
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