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.
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 legislation.
Do it for the dividend?
Historically, utilities have been some of the safest dividend stocks around. Southern's 4.7% dividend yield is enough to make most income investors salivate -- but it's important to look beyond quarterly payouts.
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.
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The article Southern Company Earnings: Will Coal Kill This Dividend Stock's Success Story? originally appeared on Fool.com.
Justin Loiseau has no position in any stocks mentioned. The Motley Fool recommends Southern Company. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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