Southern Company: Big, Deep-Fried Yield

01/06/2011 11:24 am EST

Focus: STOCKS

Roger Conrad

Founder and Chief Editor, Capitalist Times

The Southeast utility is a growing cash cow thanks to the forbearance of friendly regulators, writes Roger Conrad, editor of Utility Forecaster.  

Over the past decade Southern Company (NYSE: SO) has generated a compound annual return of nearly 12%. Last month’s approval of the company’s three-year rate hike in Georgia—source of nearly half its revenue—is the best possible assurance of a similarly enriching performance for the next ten years.

The Georgia Public Service Commission approved 70%, 93% and 87% of the requested increases for 2011, 2012, and 2013, respectively, as well as a superior 11.15% target return on equity.

The company will recover costs for environmental compliance and ongoing construction, including for two new nuclear reactors at the Vogtle site.

Equally important, these terms were reached by successful negotiation with major customers and the PSC’s Interest Advocacy Staff. That’s a clear demonstration that Georgia remains an extremely favorable regulatory environment, as are Alabama, Mississippi, and Florida.

And that, in turn, means a projected $17 billion in capital spending over the next three years will flow through to earnings, particularly as the Southeast economy continues to bounce back.

Coal generates roughly 70% of Southern’s electricity, and new Environmental Protection Agency rules on carbon dioxide will increase costs. Regulatory support, however, ensures recovery while the potential for truly harmful legislation is nil.

The upshot: Management should have few problems meeting its annual profit growth goal of 5% to 7%. Coupled with the nearly 5% yield, that’s yearly returns of 10% to 12% in perpetuity.

Buy Southern Company up to $40. [Shares closed just above $38 Wednesday. Another utility stock Conrad favors, Exelon (NYSE: EXC), is up 4.3% since mid-December—Editor.]

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