Dividend Farming Scorecard: The Southern Company

In an early December post on selecting investments for my Dividend Farm, I highlighted factors I investigate when considering whether or not to add a firm to my portfolio.  It’s a new year and time to think about adding seed money to expand my crop of dividend payers.  With that in mind, I thought it might be interesting to begin analyzing possible additions.

The table below provides a summary of factors I consider as part of my selection process as applied to Southern Company on January 1, 2019.  Laying out my analysis like this helps me quickly benchmark against my target metrics and compare this firm to alternatives.

FACTOR	METRICS	THE SOUTHERN COMPANY
CCC List	Champion	Contender
Current Yield	4.0%	5.7%
Company Profile	Red Flags	Telco Svcs?
Industry Leadership	Top 10	#9
Market Cap	$10 B+	$45 B
P/E	< 20	18.3
P/B	< 2	1.8
Debt / Equity	< 1	6
Dividend History	25 Years	18 Years
12 Month Price Range	Lower Half	Yes
Dividend Payout Ratio	< 75%	98.3
Portfolio Weight	Slightly Over	Yes

The first column lists the primary factors I review.  The middle column lists the benchmarks I’m aiming for.  The last column highlights The Southern Company’s metrics so I can see how well they align with my benchmarks.

CCC List: The list is in reference to firms found on the DRIPinvesting.org web site in the Champions, Contenders, Challengers list.  SO is located in the Contenders section so it’s off to a great start.

Current Yield:  SO’s yield is a healthy 5.7% as of the CCC chart last updated on 12.1.18.  A 5.7 yield handily beats my 4% target.  SO is two-for-two.

Company Profile:  In reviewing the profile I notice that SO is not just into generation and transportation of power (electric and gas), but it’s also got a play in the telco sector.  This strikes me as being outside the firm’s circle of competence (potentially) as Warren Buffett puts it, but it’s not a show stopper.  Additionally, I take a look at recent news articles about the company to see if there are any events being reported that may have long-term, negative implications.  I didn’t locate any for SO.

Industry Leadership:  I’m interested in companies in the Top 10 of their industry.  Investopedia listed SO as the 9^th largest utility in the United States so that’s good.

Market Capitalization:  SO’s market cap is well in excess of my target for large companies in which case it’s still on track as a possible add.  I should add that I’ll reference the market cap against revenue to ensure I’m not getting tangled up in something stratospherically priced relative to income.  I consider it a cross-check to the P/E.

Price to Earnings:  The P/E ratio is below my target metric as well.  The P/E is for the trailing 12-months rather than the leading 12-months.  I’d rather base my analysis on facts vs forecasts when possible.  Also, the P/E of 20 for the trailing 12-month period is a Benjamin Graham recommendation.  SO meets the mark here as well.

Price to Book:  P/B should be less than 2 in my estimation.  Beyond 2 and I figure I’m paying for blue sky, good will, or any number of other things that don’t translate into cash flow or profit.  This metric is another of Ben Graham’s.  SO squeezes under the bar on this one so it remains in the running.

Debt to Equity:  D/E is important to me for the same reason my debt relative to my income and net worth was important to my lender when I borrowed money to buy a house.  Too much of the former and not enough of the latter generally spells trouble on the mortgage front.  Therefore, a firm that’s too far of the market on this metric must provide a significant advantage or meet a critical need elsewhere as an offset.  However, when the D/E is 3x my target, I immediately consider taking a pass.

Dividend History:  18 consecutive years of dividend payments is solid.  However, it’s not outstanding because it’s less than 75% of my target.  Although not a show stopper by itself, in tandem with the D/E figure, it may well be.

Price Range:  The price at the time of this writing was $43.92 which put in in the lower half of SO’s twelve-month price range.  I’d rather be in the bottom half of the range than the top in order to avoid over paying or potentially getting caught in the hysteria of Mr. Market.  Also, I generally don’t look long at firms with stock prices well in excess of $100 a share.  I’d prefer buying a larger number of shares than smaller for a given dollar amount.  Less is more.

Payout Ratio:  I generally like the dividend payout ratio to be under 75% in hopes there may be a little extra headroom for growth.  However, I’m not overly concerned if it rises above that point as long as the firm delivers a steady, high yield due to my preference for high yield vs high growth, all things considered.  SO has a pretty steady dividend history so a high payout ratio, particularly in a regulated industry with large capital infrastructure costs and enormous barriers to entry like those of utilities, doesn’t give me heartburn.

Portfolio Distribution:  Last, but not least, I look at what the holding would do to my portfolio distribution if I add it.  Utilities fall into my Energy segment which is the third largest bucket of the nine I break my portfolio into.  The size of the additional investment I make will affect my decision.

Taken in a vacuum, SO appears promising.  Except for the high debt to equity figure and the potential effect on my portfolio balance it actually looks attractive to a conservative Dividend Farmer.  However, I don’t normally look at firms on a stand-alone basis.  Instead, I’ll run this analysis across multiple possibilities to see if any one of them provides a better fit than SO.  If the opportunity-cost exercise is favorable, then SO could be a valuable addition to the portfolio. 

I don’t currently have a stake in SO.  How the firm stacks up relative to other options and to my pot of funds available to invest will determine whether or not it gets added.  Stay tuned.  In the meantime, spring is just around the corner.  No better time than now to think about Dividend Farming.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed here should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.