01/22/2014 5:00 am EST
Our top conservative recommendation for 2014 is a utility stock with a yield of nearly 5%, which is a percentage point higher than the Dow Jones Utility Average, notes Roger Conrad, editor of Conrad's Utility Forecaster.
The primary reasons for the high yield at Southern Company (SO) are concerns it will not be able to earn a fair return on a projected $17.5 billion in capital spending planned for 2014-16, and worries about potential cost overruns at the Kemper, Mississippi clean coal plant and the Vogtle, Georgia nuclear plant—both currently under construction.
Big capital budgets and nuclear power plants conjure up fears about a reprise of the 1980s, when companies like Southern wrote-off billions of dollars in costs that regulators would not pass on to customers in rates.
A rate settlement in Mississippi, however, has resolved rate issues at Kemper, at least, for now. And in Georgia, the rate settlement approved in December by regulators, ensures another three years of fair recovery at Vogtle, as well as, a generous return on equity of 10.95%.
Built on Toshiba/Westinghouse's AP 1000 design, the cost of the Vogtle plant is being recovered as incurred. That's a stark contrast to the nuclear projects of yesteryear, when companies waited until plants were completed to ask for rate boosts, resulting in severe sticker shock.
There's still a risk that costs could increase at Vogtle, as well as Kemper, above recovery rates in current settlements. The company, however, has been very forthcoming with updates and the majority of work is now behind it. And Vogtle has had no major cost overrun issues since the permitting stage.
Until these plants get closer to startup, Southern is likely to trade at a discount to other utilities. The current yield and reliable dividend growth of 3 to 5% a year, however, make a compelling combination until then, for conservative investors.
And the company is also a major solar power investor through its alliance with an investment group controlled by billionaire Ted Turner. Buy Southern up to $45.