Southern Company A Diversified Play On Clean Energy
Southern Company (NYSE:SO) is a high-yield play on clean energy. The company operates a wide variety of power-generating and gas-delivery businesses with a target of achieving 0% greenhouse emissions by 2050. Based on what the company is telling us, the target of a 50% reduction by 2030 is well on track. The latest report leaves a lot to be desired but one thing is clear, this company is serious about alternative and clean-energy. The downside is its highly-leverage nature and the impact of COVID on the business.
Southern Company Rebounds Strongly, But…
Southern Company reported its 3Q results and shares are falling because of it. The company reported a strong 21% rebound in revenue from the hard-hit 2nd quarter but the gains are not enough. The consensus estimate was another full 12% above the headline figure suggesting the full-year and even next year’s targets are off. On a YOY basis, revenue is down -6.3% from the previous year due to decreased demand for power, gas, and infrastructure services. On the bottom line, GAAP and adjusted EPS are both below last year’s figures and mixed in regards to the consensus. The GAAP EPS missed by $0.05 while adjusted earnings beat by a penny.
"During the third quarter and much of this year, unprecedented circumstances, including the COVID-19 pandemic and an exceptionally active storm season, have confronted our customers and communities. Employees throughout the Southern Company system have responded by continuing to deliver industry-leading reliability and service to those customers we are privileged to serve," said Chairman, President and CEO Thomas A. Fanning. "Our priorities moving forward include maintaining best-in-class service levels and cost discipline at our utilities while continuing to work diligently to bring Vogtle Units 3 and 4 online by the November 2021 and November 2022 regulatory-approved in-service dates."
The Dividend, It’s Good But There Is A Caveat
The Southern Company is a solid dividend-payer in terms of its history and yield. The stock yields about 4.5% right now and the company has been increasing the payout on a consecutive annual basis for 19 years. Based on the low CARGR it looks like it is on track to make it a 20th regardless of the business rebound.
The catch is that the payout ratio is high. That is not a huge worry for an electric utility by itself but this company is also highly levered. Due to the COVID-related slowdown in business and some ongoing projects, the company’s cash flow and free-cash-flow are very tight. However, in Southern Company’s favor is the fact it is still able to access the credit markets and recently raised another $3.4 billion. At least $1 billion of that was used to pay off some other, more expensive, debt and there are those projects to consider.
The most important is the Vogtle nuclear project in northwest Georgia. The project has experienced numerous delays and cost overruns that have brought the company’s total cost to well over $14 billion. The upshot is that Southern Company execs say there are still on track to begin functional operation in late 2021 and 2022 for units #3 and #4. When completed it will be the U.S. largest nuclear power generating facility.
The Technical Picture: Southern Company Is Finding Support
The 3Q earnings report isn’t good but this may be a case of that-was-then-this-is-now. Looking forward, the economic rebound is underway even if we don’t get back to pre-COVID levels really fast and the outlook for Southern Company is for revenue and earnings to expand. Add to that the promise of all that nuclear power that will soon be available and the long-term prospects for this investment are bright, no pun intended. The hurdle now is resistance at the $60 level. Today’s action looks promising because the stock is finding support at the short-term moving average. I wouldn’t be a buyer, however, until price action moves up above the $62 level and stays there.
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