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Update on SO: Power—With a Southern Accent

My colleague, Steve Gunn, recently expressed his appreciation for Southern Company (SO)…

And since Southern Company has just announced another dividend increase, now’s a good time to take a second look.

Southern Company is a holding company, whose subsidies control most of the electricity generated throughout the South and provide power for 4.4 million customers across their respective states.

Traditionally, utility companies are great dividend payers, and Southern Company is among the best of breed.

On April 15, 2013, Southern Company announced an increase in its quarterly dividend for the twelfth straight year, bumping its annual dividend up by $0.07 per share.

And if you become a shareholder by May 6, 2013 – a mere three days away – you’ll be paid the new dividend amount on June 6.

This is the latest in an unbroken chain of cash payments going back over 40 years – an enviable record by any standards.

From everything I can see, this string of dividend increases is bound to continue well into the future.

Reduce, Reuse, Recycle

One of the keys to Southern Company’s sustained growth will be a reduction of its reliance on coal as a power source, with a focus instead on natural gas and nuclear generation.

You see, both nuclear power and natural gas are cleaner than coal, and burn far more efficiently.

Already, coal-fired power represents less than half of Southern Company’s overall production, with around 20,000 out of approximately 46,000 megawatts of electricity coming from coal.

Southern Company is also in the process of constructing a new nuclear power plant, the first in years allowed in the United States.

In addition to the likelihood of sustained growth, another thing to consider is that Southern Company shares are rock solid, clocking in with a beta of only 0.25. In other words, the stock is 75% less volatile than the overall market.

There is one caveat, however…

Regional Risk

As its name suggests, all of the company’s holdings are in the South, an area notorious for tornadoes and hurricanes.

Hurricane Katrina, for example, was the worst disaster in the history of Southern Company’s Mississippi Power subsidiary.

The storm knocked out power to all 195,000 Mississippi Power customers.

It destroyed two-thirds of the transmission and distribution system. And 119 of 122 of the company’s transmission lines were out of service.

In the aftermath of Katrina, the restoration of power in Mississippi proved to be the most expensive in the company’s history, costing more than $250 million.

And that was just for one state.

As you can see, weather can be a major factor when looking at profitability.

Even so, as Steve Gunn pointed out, the most important factor for earnings growth within the utility sector is an expanding population.

And the South has grown consistently for years, and isn’t showing any signs of slowing.

So even with the ever-present regional risk that Southern Company contends with, I still consider it a strong “Buy” for income seekers.

Safe investing,

Tim Diering