In my half year review of 2017 (You can read it here – Letter to my readers – 2017: Half year review). I looked into way more companies, but didn’t post this on my website. So I imposed myself to publish more analysis Pollie-style.
Today is my second analysis for this new goal.
For my analysis I use the famous CCC-list of David Fish and my Pollie-code.
Okay but which company to look into? First of all, I have 2 important lists of stocks I really like. The first list is my watch list. This list contains about 20 stocks. The second list is my list with Dividend Zombies (For more information on the Dividend Zombies, just read my Impressive stocks post). But before I pick a stock, I also have to look at my total portfolio.
A good diversified portfolio is exposed to a wide variety of stock sectors. For the classification of the stocks in my Vrijheid Fonds, I’m using the sectors as mentioned in de David Fish “US Dividend Champions” spreadsheet. In my Vrijheid Fonds I’m not invested in the Utilities sector. So I’m looking to increase my exposure in this sector. With some high yields in this sector it can be interesting (but first I have to do my homework 😉 )
So this analysis is on The Southern Company (SO).
From google finance: The Southern Company (Southern Company) is a holding company. The Company owns all of the stock of the traditional electric operating companies and the parent entities of Southern Power Company (Southern Power) and Southern Company Gas, and owns other direct and indirect subsidiaries. The Company’s segments include Gas distribution operations, Gas marketing services, Wholesale gas services, Gas midstream operations and all other. The Gas distribution operations segment includes natural gas local distribution utilities that construct, manage, and maintain intrastate natural gas pipelines and gas distribution facilities in seven states. The Gas marketing services segment provides natural gas commodity and related services to customers markets that provide for customer choice. The Wholesale gas services segment engages in natural gas storage and gas pipeline arbitrage. The Gas midstream operations consist primarily of gas pipeline investments, with storage and fuels.
Can I explain this to a 10-year old? What Does This Company Do?
This company gives you gas and electricity to use in and around your house. For instance to prepare a meal on your stove and to power your refrigerator to give you a cool Coke.
Dividend Aristocrat: Southern Company has been paying dividends every quarter since 1948. And SO has raised its dividend for 17 consecutive years. It is therefore a Dividend Contender on the CCC-list from David Fish! (No.183). They are a three star stock on Morningstar.com. The company hasn’t reduced its dividend in the last 30 years. However because it hasn’t raised its dividend for more than 25 years, it is a Fail!
Dividend Yield > 2.5%: The dividend Yield of SO is 4.85%. This is above the industry average of 3.1%, and slightly above its 5 years average (4.6%). The Yield is above the requirements of the Pollie-Code, and therefore it is a Pass.
Dividend payout <70%: The dividend payout is roughly 86%. This is above the maximum ratio, and therefore a bit more risky. Therefore SO failed for this point.
DGR 1 year > 0%: The dividend growth rate for 1, 3, 5 and 10 years are 3.3, 3.4, 3.5 and 3.8. With a 3-years average around 3.4% this looks very good! And it is above the requirements of the Pollie-code, so it is a pass.
P/E-ratio < 15: This is an easy metric that is well documented. It can be used as a quick metric to identify stocks that may potentially be undervalued. I use this to identify stocks that may be discounted compared to the overall stock market. SO has a current P/E ratio of 17.8. The industry average is 17.3. The P/E ratio is slightly above the industry average. But it is lower that its 5-years average (19.3). The P/E-ratio is above the requirement of the Pollie-Code. So this is a Fail.
EPS > 0: The EPS is 2.69. Therefore SO passed the sixth Pollie-Code
ROE > 10%: Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. The current ROE is 10.9%. This is another Pass.
Market Cap. > 100M: No problem at this point. The Market cap. Is more than $ 48.427 Mil. You guested it already: Another pass.
Chowder Rule > 12: Named after “Seeking Alpha” member Chowder. This is a method of identifying candidates for purchase based on a combination of yield and (5-year) dividend growth rate. When the sum of these elements is above 12%, the company presents an attractive entry point (8% for utilities). When the figure is above 8%, an existing holding is still considered worthy of being retained. The current Chowder rule is 8.3. Because SO is a utility it is above the requirement of the Pollie-Code. So it is another Pass.
Stock price 52wk high-25%: The 52 wk. high and low are: 53.80 and 46.20. This means that SO will be in my buying zone when the stock price is below 51.90 ((53.80-46.20)*0,75 + 46.20). At this moment SO is trading for $47.20. Therefore it is a pass on the Pollie-Code.
Beta: I think it’s important to have low Beta stocks in my portfolio. This helps to have a stable income all the time, even when the market has a rapid decline. The Beta for SO is 0.13.
Debt/Equity ratio: The Debt/Equity ratio of SO is 1.71. This is very high. But SO has been changing in a greener company, for which they need a lot of money.
When I look at my analysis, The Southern Company passed 7 out of 10 metrics of the Pollie-code. Okay The Southern Company isn’t a Dividend Aristocrat yet, but is on its way And I don’t think the valuation is too high now, at about 17 times earnings for the stock, as the company continues to make some strong moves toward cleaner energy sources.
Normally a utility isn’t going to hand out big dividend raises every year. I think Southern Company is a kind of stock that pays a nice dividend and raises its dividend above the inflation rate. And with a very low Beta it nicely balances the portfolio.
It is almost unlikely that Southern Company will generate double-digit returns. Still, total returns of 7.8% to 8.8% a year in combination with low risk and low volatility make Southern Company an interesting choice.
All this information together I certainly will leave SO on my watch list for my Vrijheid Fonds and probably will take action in the near future. 😎
What are you – the readers, thoughts on The Southern Company? Is it a buy, do you own it?
Please comment on my analysis and thanks for stopping by!
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