Here's What Makes This Utility Stock So Safe
Southern Company (NYSE: SO) is an electric and natural gas utility with a long and successful history of reliability. That underpins its status as a relatively safe investment option for those seeking a trustworthy source of passive income, and it offers a generous 3.8% dividend yield today. Here are a few reasons why the stock of this electricity and natural gas utility is so safe.
1. A necessary product
The modern world doesn't work without energy. Spend a few hours without electricity, and you realize how the world would revert to a much less desirable state without it.
Southern's ability to provide products that are essential to modern life makes it a very resilient business. In fact, ensuring reliability is one of the key drivers of the company's capital investment plans, which brings up point No. 2.
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2. Regulated to be slow and steady
The infrastructure needed to support a reliable utility business is pretty big and companies are granted monopolies in specific regions by the government. Thus, not only is Southern offering a necessity, but it is also the only game in town where it operates. In exchange for that single-supplier model, Southern has to agree to tight regulation from the government. Basically, it has to get its investments and price increases approved by regulators. This is good, in that spending tends to take place regardless of the stock market's gyrations, but bad in that regulators tend to keep growth capped at a modest pace.
Based on the current environment, Southern is targeting dividend growth of $0.08 per share per year. The annual dividend is currently $2.72. That predicted growth is not huge (a 3% dividend increase was announced in April), but given the backdrop (more on this later), it's not exactly bad, either. The spending plans, meanwhile, are all about ensuring that Southern remains just as dependable for customers in the future as it has been in the past.
3. The problems are well known
The backdrop I noted above is all about the company's efforts to build two nuclear power plants in Georgia, collectively known as the Vogtle project. They are late and over budget, which is the bad news. The good news is that they are getting closer to completion and expected to be up and running next year. That's if everything goes according to plan, which has yet to be the case for the Vogtle project.
Still, when the plants are running, Southern will have more carbon-free power at its disposal. That supports its ongoing shift toward cleaner energy sources, which mirrors the broader trends in the utility industry. And since nuclear is a baseload power source that constantly supplies a minimum amount of power, it actually complements the company's efforts on the solar and wind fronts, as these power options are variable in nature. Right now, Vogtle is a known negative, but it could soon turn into a positive.
4. Financially strong
Helping to support Southern's appeal as a safe investment is the company's investment-grade balance sheet, which gives it easy access to relatively cheap debt capital. To put some numbers on that, Southern's average debt cost is at an around-3.5% interest rate, and its average maturity is around 18 years. There's likely to be room for additional leverage if the company faces material adversity.
5. A great dividend record
Southern has increased its dividend annually for 21 consecutive years, which is pretty good but hardly incredible. What's more impressive is that for over 75 years, the company has either increased the dividend or held it steady. That's a reliable dividend. And since dividends are a key part of the return equation for utility stocks, the commitment the company has shown over time increases the safety of Southern.
Not exciting, but not meant to be
At the end of the day, Southern isn't an exciting investment, even though there are still uncertainties here (Vogtle). But it is one that has proven to be safe and reliable over time, particularly for dividend investors looking to create a passive income stream. If you are examining the broader energy sector and want something a little more boring than an oil stock, branch out to the utility space and look at Southern Company.
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Reuben Gregg Brewer has positions in Southern Company. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
