Southern Company (SO, Financial) is performing strongly since last year. The company also pays a healthy dividend yield of 4.60%, and has been able to deliver on its guidance despite various concerns. Moreover, Southern looks set to get even better going forward, which is the reason why investors should consider this company for their portfolio.
Superior improvements
Southern Company has displayed tremendous improvements in transmission and distribution reliability networks that have resulted in various strong projects such as Georgia Power. The public service commission has approved a constructive three-year agreement for Georgia Power that will help the company to improve its profit and operating margins going forward. Also, Southern is expected to benefit in a big way as Georgia Power has recently completed an integrated resource plant in the third regulatory proceeding.
Southern Company is pleased with the outcome as the public service commission approved the settlement agreement between Gulf Power and all of the interveners in the rate case in Florida. Also, it reached a settlement in January 2013 that is generating incremental Kemper-related rate, and should result in a subsequent rate increase in 2015 for the securitization of certain project costs that should increase its overall profitability.
In addition, the company was able to achieve a record low incidence rate as it experienced reductions in loss work day cases and preventable vehicle accidents for the third year consecutively. The company demonstrated healthy improvements with sub module fabrication and documentation in Lake Charles, Louisiana. Its ability to meet tough challenges with ease has won it strong projects such as Chicago Bridge &Iron and Westinghouse, apart from illustrating its rigorous oversight in place for this project.
The site is expected to develop strongly this year. Product risks on the Turbine Island and Cooling Tower for Unit 3 are expected to stay, and the Nuclear Island for Unit 3 is expected to show exceptional performance. Further, the company is of the view that progress at Unit 4 should continue.
Besides, the company has registered solid progress in the Kemper IGCC project. The transmission infrastructure was completed during 2013 with pipelines completed, and the lignite mine was placed into service. Approximately, more than 75% of the piping has been installed and testing of the combined cycle is underway.
Cost control and positive indicators
Southern's consistent usage of natural gas to generate electricity has helped it offset project costs by nearly $1 million. Besides, its gasifier testing is estimated to be completed by the end of the second quarter that will mark the first heat up of a gasifier at the facility.
Apart from this, Southern is very positive about the economic indicators in the country that should improve its performance in 2014. Also, the momentum the company experienced during the second half of 2013 is expected to carry over into 2014; with anticipated GDP growth of between 2.5% and 3%. Besides, the company expects to benefit from industrial activity and exports that are the key drivers as growth is expected in chemicals, steel, auto manufacturing, and transportation.
Moreover, the company anticipates an increase in single family home starts with the dynamics of supply and demand returning to historical levels for the sector. This continued recovery of the housing sector will support stronger residential customer growth.
Conclusion
The company trades at a trailing P/E of 23.73 and a forward P/E of 15.51 that indicates healthy growth prospects ahead. Besides, its cost cutting initiatives should accelerate earnings growth. In addition, being a utility company, Southern pays a solid dividend. As we see above, since the company’s earnings are expected to grow at a consistent rate going forward, investors can expect regular dividend hikes.
