Tuesday, November 20, 2012

New Purchase - SO

The latest addition to my dividend and income portfolio is 29 shares of the Southern Company.  This purchase will increase my yearly income by $56.84 on a 4.62% yield.  I'm actively trying to increase my utility holdings right now while prices are reasonable.  I don't think I need to introduce SO or what they do, this one is one of the largest electric utilities in the United States.  I like SO for a variety of reasons.  The population in their service area is growing faster than the national average, it's diversified into a wireless telecom business, it's large and stable, it has a history of growing EPS better than peers, and it is currently building the first new nuclear reactor on US soil in 30 years.  Obviously the yield is quite attractive.  The payout ratio is fairly high, but I'd be thrilled to see dividend growth of 3-4%.

I did catch this one at the 52 week low, but the valuation I paid is about average historically speaking.  Utilities have been pretty pricey most of 2012 as income investors have bid them up for the income.  With bonds paying next to nothing investors need to find yield somewhere.  So basically I'm okay paying an average valuation in a low interest rate environment.  I certainly don't think this one is a bargain, but it's not terrible either.  I like SO a lot and will be happy to collect the slowly growing dividends.  This company is going to need to replace or upgrade many old coal power plants, it's something I will keep an eye on.  Hopefully the new nuclear facility will help SO move further away from coal.

I might make one purchase in November.  Right now I'm considering INTC, PPL, VZ, and NSC.

7 comments:

  1. Nice buy. Good utilities are a sure bet and will increase distributions inline with inflation - and hopefully more. The good ones in Canada, like Fortis, Emera, TransCanada and Enbridge, have also been bid up.

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    1. I've looked at Emera before. I liked it enough to add it to my watch list. Everyday when I check the market I see its price and relevant news. I've heard of Fortis, but am not familiar with that one. Looks like I have something new to research. thanks!

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  2. Nice buy! I'm about ready to make a move as well, and this one is near the top of my list. The only thing that concerns me a bit is that the payout ratio is close to 70% or so, last time I checked. SO has been able to consistently grow the dividend in spite of that (since 2001) though. This should make for a nice long term play!

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    1. It's well over 70% these days, the last earnings report was a miss. It's 77.5% which sounds bad but remember this is a utility. In other sectors I wouldn't even consider something with a payout ratio like that! A lot of it depends on weather and mother nature. If we have cool summers people don't need to keep the A/C cranked up nonstop.

      I'm not trying to make outsized returns or a quick buck with Southern. Nope I just want to collect rising dividends to reinvest. Hopefully I'll never have to sell it. If it stays flat for 10 years that's fine!

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  3. Gotta love the utilities. Near monopoly, and can't exactly just go out of business. Someone has to heat and light homes.

    The only thing I notice with SO is significant negative FCF over a long period of time. Not all that uncommon with utilities, but I do wonder when overall profitability will come back with SO. The big outlay on the nuclear facility certainly doesn't help CAPEX, but could result in great returns in the future.

    I would like to diversify my utilities a bit. Right now I only have UNS and AVA, but there are plenty of big and small utilities out there that offer strong, and rising, dividends.

    I almost bit on INTC today after the big drop with the CEO news. It's yielding just a smidge below SO right now!

    Best wishes.

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    1. I'm guessing a meaningful amount of the capex is being spent on the new nuclear reactor and other investments. I really doubt it's all maintenance capex. But I know what you're saying there.

      Having FCF for huge dividend growth and share repurchases is very rare in the utilities sector. One exception is WEC that I know of. Check them out you might like it. Its yield of 3.3% isn't bad either.

      I'm not sure what to think of INTC right now. I want to make one final purchase, but I'm not sure what price to set it at. I've seen Intel go below $18 before so we may see it fall even more. It's a tough call because I'm only going to buy it one more time.

      Boy I purchased some for around $24 a few months ago, horrible decision. I think with tech stocks you need to bake in a huge margin of safety because things change so damned fast. Either that or just say fuck it and put the money in a safer sector.

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  4. Companies like southern company make excellent stocks to invest for dividend income. Electric utilities are usually slow growing companies. But many of these stocks have excellent dividend payouts.

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