Boring Can be Beautiful

By Ryan Guenette - July 17, 2012 | Tickers: AEP, ED, D, DUK, SO | 0 Comments

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A tremendously intelligent man once told me, “If you want to get ahead in the market don’t look at the movers and shakers list, instead find the companies that provide necessities to people, like electricity.” The utilities sector is undeniably the steadiest sector in the market. On down days, utilities will only be marginally lower or may even break out to the upside. On up days, utilities will usually follow the overall market but may not rise to the upside as much as other sectors. Just look at the below chart to see how the Utilities SPDR (ETF) has outperformed the S&P 500 over the past decade, which is not including dividends.

Utilities provide electricity and electric services to the population of a certain area. Most of the time, the citizens have no choice in what company provides them with electricity because of the infrastructure capabilities. This results in a dependable source of revenue for the utilities companies, which allows them to pay out huge dividends. Out of the entire sector, The Southern Company (NYSE: SO) stands out as the most sustainable and maintainable company.

100 Years of Growth and Service

The Southern Company was founded on January 5^th, 1912 by James Mitchell, a man whose vision included an enormous system of hydroelectric generating stations and power lines stretching the entire Southeast of the United States and bringing with them economic growth. Now one hundred years later, The Southern Company is still going strong, fulfilling his dream one watt at a time. Nothing screams sustainability more than being in business for one hundred years. Not a lot of companies can say they have been in business for a hundred years, living through two World Wars, the great depression, the great recession, the landing of a man on the moon, September 11^th, 2001, the Vietnam War, the assassination of John F. Kennedy, the death of Osama bin Laden, the Manhattan Project, and the Iraq War. The Southern Company has seen America in its best days, and been there with America in its darkest hour, and will continue to thrive and flourish over the next one hundred years.

Growth That Outpaces Competitors

Usually if an investor is looking to the utilities sector, he/she is not searching for explosive growth, like that in certain technology names. But in order to continue to increase the dividends, utilities must show growth, or else the dividend would become unsustainable. Compared to some of its biggest competitors such as: Dominion Resources Inc. (NYSE: D), Consolidated Edison Inc. (NYSE: ED), American Electric Power Company Inc. (NYSE: AEP), and Duke Energy Corp. (NYSE: DUK), The Southern Company is the third best in current year growth and the best company in terms of growth expected for the coming 5 years. 

This sustainable and reliable growth will prove to supplement Southern’s dividend and may potentially make this utility more than just a dividend play. 

Why Dividends Pay

Holding dividend stocks is not a strategy for investors looking to gain quick profits. The longer the investor holds the dividend stock, the more the investor will make. Say The Southern Company never moved from its current price of $47.64, and continued to pay its $1.96 annual dividend. Without dividend reinvestment, the investor would have $67.24, $47.64 for 1 share, and $19.60 of dividends. This represents a 41.14% return on initial investment. With dividend reinvestment, the investor would have 1.5 shares of SO, worth $71.30. This represents a 49.66% return on initial investment. With dividend reinvestment, in 20 years the initial investment will be worth $106.70, representing a 123.97% return. With dividend reinvestment, in 30 years the initial 1 share will turn into 3.35 shares of SO and be worth $159.69, displaying 235.20% return on the initial investment. Just look at the chart of past returns of The Southern Company with dividend reinvestment. 

Currently, the Southern Company pays out a quarterly dividend of $0.49 a share, which represents a $1.96 yearly dividend per share or 4.11% in yield. Estimates show the yearly dividend rising to $2.02 in 2013, and $2.08 in 2014. This represents 3.06% dividend growth from 2012 to 2013 and 2.97% dividend growth from 2013 to 2014. The Southern Company has paid out regular dividends to its investors for 257 consecutive quarters, dating back to 1948. This tremendous track record of paying out dividends instills remarkable confidence in the investors of the company. Below is a chart of The Southern Company’s growing yearly dividend and earnings per share in the coming years. Additionally shown is the rate of dividend, or the percentage of net income that is paid out in the dividend. 

The Foolish Bottom Line

In this volatile market with concerns of the Euro breaking apart into a million different pieces and the Chinese economy having a rough landing, it is always assuring and comforting to know inside your portfolio sits a company that has been around for 100 years, and a company that is growing enough to support and grow its dividend. Although in the short term The Southern Company will not hand investors any dazzling returns, 30, 20, or even 10 years from now The Southern Company will hand its investors safe and solid returns. 

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