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Investors' Guide to Southern's (SO) Recent Dividend Hike

Sticking to its yearly ritual, electric utility firm The Southern Company SO made an announcement on Monday to up its quarterly payout by 2 cents to an annualized rate of $2.80 per share.

Let’s take a closer look at SO’s dividend strength, especially for investors interested in loading up on such investments.

With their regulated business models and stability in earnings, utilities are among the most consistent dividend stocks in the market. Southern Company is one such blue-chip utility stock.    

Based in Atlanta, GA, Southern Company is one of the largest power suppliers in the United States. Offering an enticing dividend yield, the company remains an attractive option for investors seeking a steady stream of income.

Positioned in a niche industry with high barriers to entry, Southern's less-volatile, recession-proof business model presents a unique opportunity to earn high returns and steady payout hikes each year.

Inside the Business

Following its merger with AGL Resources on Jul 1, 2016, Southern Company serves approximately nine million customers through its seven electric and natural gas distribution units. It boasts a generating capacity of 43,000 megawatts and employs some 27,000 people. Southern Company’s operations include wholesale electricity generation and natural gas services, retail energy services and natural gas storage operations throughout the country.

Strong Dividend History and Attractive Yield

One of the premier domestic utilities, Southern Company pays an annual dividend of $2.80 per share, yielding an attractive return of 3.9% and above most other utilities. To put things into perspective, the average yields for the utility sector and the S&P 500 are 3.2% and 1.5%, respectively.

The firm hiked its dividend payout by 2.9% earlier in the week, marking the 22nd consecutive year of such an increase. In particular, Southern Company boasts an uninterrupted streak of paying dividends since 1948.

Below-Average Payout Ratio Allows Room for Further Hike

Using Southern's 2023 projected EPS midpoint of $3.60, the utility pays out 77.8% of its earnings as a dividend, which is steep for most stocks but is still slightly low compared to the sector's average payout of 79.4%. With the utilities characterized by reliable and sustainable future cash flows, Southern forecasts earnings between $3.55-$3.65 per share in the current year.   

Moreover, Southern also maintained its long-term earnings per share growth outlook of 5-7% until 2024, with EPS reaching $3.95-$4.10 by that time. We believe this should be sufficient for modest dividend increases going ahead.

In fact, the utility is likely to be able to sustain a payout ratio in the range of the high 70s for a few years, which should eventually come back down once construction of the Vogtle nuclear plant expansion project ends.

Zacks Rank & Stock Picks

Southern Company carries a Zacks Rank #3 (Hold).

Meanwhile, investors interested in the utility space could look at better options like NiSource Inc. NI, Atmos Energy Corporation ATO and CenterPoint Energy, Inc. CNP. Each of the firms carries a Zacks Rank #2 (Buy).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

NiSource: NiSource is valued at around $11.7 billion. For 2023, NI has a projected earnings growth rate of 6.8%.

NiSource delivered a four-quarter average earnings surprise of 0.2%. Headquartered in Merrillville, IN, NI shares have lost 11.3% in a year.

Atmos Energy: Atmos Energy is valued at around $16.3 billion. For fiscal 2023, ATO has a projected earnings growth rate of 7.1%.

Atmos Energy delivered a four-quarter average earnings surprise of 4.6%. Headquartered in Dallas, TX, ATO shares have lost 5.9% in a year.

CenterPoint Energy: CenterPoint Energy is valued at around $19.3 billion. For 2023, CNP has a projected earnings growth rate of 8.7%.

CenterPoint Energy delivered a four-quarter average earnings surprise of 2.1%. Headquartered in Houston, TX, CNP shares have lost 6.1% in a year.

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