The Southern Company (NYSE: SO) has an enviable dividend track record in one sense, and yet the dividend has been less than stellar in another. But the next decade for this large, regulated U.S. utility will likely look very different from the last.
This is a good thing for dividend investors, with management setting a fairly clear goal for the positive changes it is considering.
Rewarding investors well with dividends, even in difficult times
Southern has increased its dividend every year for 22 consecutive years. But that’s just the beginning of the dividend record here, as it has remained flat or increased for a full 76 years.
It’s a statistic that even the most conservative dividend investor will find it attractive. It highlights a commitment to returning value to investors through a growing dividend that few other companies can match.
Notably, the utility has supported the dividend through good times and bad. This includes the Great Recessionthe coronavirus pandemic and even the dramatic rise in inflation in the 1970s.
Southern is the type of dividend stock you buy as the basis of a more broadly diversified portfolio. You don’t expect it to be exciting, but you expect it to be reliable.
Over the last decade alone, this utility has been a bit of a laggard in dividends, and by a significant amount. Payout growth over this period has averaged only about 3% per year. In all honesty, that’s about enough to keep up with the historical rate of inflation growth over time. So the purchasing power of Southern’s dividends hasn’t diminished, which is a good thing. But investors are generally hoping for a little more.
So overall, there’s a lot to like about Southern’s dividend, although there is one notable issue to complain about. This little problem is about to change.
What’s happening at Southern
The biggest hurdle for the utility over the past decade, which has forced it to limit dividend growth, is the Vogtle project. It includes two large-scale nuclear power plants, and it has gone over budget and been delayed several times.
To suggest that the construction process did not go well would be an understatement; THE the original entrepreneur declared bankruptcy (requiring Southern to take on this role), and it had to deal with the disruption caused by a global pandemic.
That’s the bad news, and it’s the main reason Southern has held back dividend growth, keeping it slow and steady. But the first of the two plants is now connected to the network, and the second should be operational in early 2024.
THE utility estimates that the two plants, once fully operational, will add up to $700 million to the company’s operating cash flow. There is a double benefit, since the capital expenditures associated with Vogtle will disappear and the power plants will start generating revenue.
This money will be used in several ways. Debt reduction and investment in other capital projects will be the first priorities. But according to management, once the company reduces the The payout ratio below 70%, the goal is dividend growth that more closely aligns with earnings growth.
Currently, management projects the payout ratio to be around 77%, so don’t expect an uptick in dividend growth in 2024. However, 2025 appears to be a real possibility, the distribution rate being the main figure to monitor throughout the year. path.
A new vision of the South
As the chart above shows, Southern shares have largely resisted the broader utility sector downtrend, using the Vanguard Utilities ETF (NYSEMKT:VPU) as agent. That’s probably because Wall Street was very down on the stock as it worked its way through the Vogtle project. Now that the project is almost complete, investors are becoming more and more positive. It’s not the business it once was.
That said, if you’ve owned Southern throughout this difficult construction project, today you are rewarded for your patience. And the reward is likely to be even better when dividend growth breaks out of the moribund range in which it has been stuck for so long.
In the meantime, if you don’t own the utility and have a dividend growth mentality, you might want to put it on your radar screen. Management has set a target (a payout ratio below 70%) for when the dividend story should move in a very positive direction.
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Ruben Gregg Brewer holds positions in the Southern Company. The Motley Fool has no position in any of the securities mentioned. The Mad Motley has a disclosure policy.
The Southern Company just gave us an idea of when its dividend will increase again was originally published by The Motley Fool
