Recent Buy: Southern Company

Welcome to our stock series, where I let you in on why a company has made it on our watchlist or even in our portfolio. This time, I focus on Southern Company.

Southern_Co_logo

On January 2, 2018 we bought 100 shares of Southern Company. At a price of €39.90 we paid €3,990.00 plus €9.98 in order fees.

What is Southern Company?

Southern Company – or Southern Co for short – is one of the leading utilities in the US. The history of the Atlanta-based company dates to the early 1920s. Today Southern Co supplies more than 9 million US citizens with electricity and gas. Although the company provides its services across the country, it still has its main operations in the Southeastern United States.

Southern Co has been working on a less coal-intensive energy mix for some time now, as the company is shifting its focus to natural gas, nuclear power and renewable energies. This transition requires a considerable amount of investment. But the progress made so far can be easily recognized by the following chart.

Southern Co Energy Mix
Southern Co Energy Mix

However, not all investments were equally successful. Southern Co is challenged by two major projects. On the one hand, the construction of the world’s first “clean” coal-fired power plant failed because the technology proved to be too expensive. On the other hand, the planned extension of a nuclear power plant almost failed after the company responsible for the construction had to file for bankruptcy.

Nonetheless, Southern Co is still a very profitable business. There might not be any significant growth driver. But thanks to a steadily growing customer base, regular price increases and the continuous expansion of its own business activities, the company should not only be able to continue its investments, but also return to its long-term growth path.

Why Southern Company?

But could Southern Co also be a potential candidate for our portfolio? That I want to show you based on our stock screener. So, let’s go!

How cheap is Southern Co?

I think a company’s stock is cheap if its current price-earnings ratio (PER) is lower than its average PER (since 2004). In case of Southern Co, current PER is sitting at 16.5. This is less than its long-term average PER of 17.1.

Southern Co Factor 1
Southern Co Factor 1

Therefore, Southern Co’s shares are currently slightly cheaper than usual. I reward this fact with 0.2 bonus points.

How strong is Southern Co?

I think a company is strong if it’s able to increase its profits both long-term (since 2004) and medium-term (since 2011). In case of Southern Co, the lower of the two growth rates is 3.3% p.a. The company’s medium and long-term earnings growth is positive.

Southern Co Factor 2
Southern Co Factor 2

Therefore, Southern Co seems to be a strong company. I reward this fact with another 3.4 bonus points.

How robust is Southern Co?

I think a company is robust if it’s able to continuously increase its profits over the long term (since 2004). In case of Southern Co, the maximum year-on-year drop in profits was 31.3% (fiscal year 2013). However, the company didn’t report any loss over the entire valuation period.

Southern Co Factor 3
Southern Co Factor 3

Therefore, Southern Co seems to be a very robust company. I grant 3.3 minus points.

Is Southern Co currently a bargain?

I think a company is a bargain if its long-term trend in earnings growth (since 2004) justifies its current PER. In case of Southern Co, due to its robustness I would allow a PER of 14.9. This is less than its current PER (16.5).

Southern Co Factor 4
Southern Co Factor 4

Therefore, Southern Co’s stock does not seem to be a real bargain now. I grant another 10.2 minus points.

Jung in Rente Score

To calculate my personal valuation metric – the so-called “Jung in Rente” score (JiR score) – I finally sum up a company’s bonus and minus points. In case of Southern Co, that leads to a JiR score of -9.9 points.

Southern Co Jung in Rente score
Southern Co Jung in Rente score

Companies with a JiR score of less than -10 rarely make it on our watchlist, let alone our portfolio. With a JiR score of -10 or higher a stock qualifies itself for deeper analysis. A JiR score of 10 or higher is seen as a buy signal.

According to my valuation metric, Southern Co has scored -9.9 points and thus is worth to be considered.

Dividends

Apart from our JiR score, I also consider a company’s dividend policy. That’s why, before every purchase, I not only check the current dividend yield but also have a look at the dividend growth rate and dividend track record as well as the payout ratio.

Southern Co Dividends
Southern Co Dividends

Up until now, Southern Co pursued a very investor-friendly dividend policy. The US-American company has increased its dividend year after year over the entire valuation period. At present, Southern Co pays out about 91% of its earnings, which is equal to a dividend yield of 4.8% considering my purchase price. If analysts’ estimates hold true, my yield should increase to 5.0% by next year.

Conclusion

Due to its stable business model as well as its investor-friendly dividend policy Southern Company – just like Japan Tobacco – already made it in my watchlist a few months back.

After reaching a new 52-week low (€40.00) and the ex-dividend date (mid-February) in sight, I decided to add Southern Company to my portfolio even without an evident buy signal.

My purchase of 100 shares of Southern Company provides me with an additional passive income of about €200 per year.

What do you think about investing in utility stocks and Southern Company in particular? Please let me know and leave a short comment or contact me on Facebook or Twitter!

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