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Income Investing

Buy Southern, Not Apple

By Roger S. Conrad on Feb. 1, 2014

Last November, I advised income investors to favor AT&T (NYSE: T) a traditional dividend paying stock, over shares of its iPhone partner Apple Inc (NSDQ: AAPL).

My call had little to do with the merits of the company that is Steve Jobs’ Last November, I advised income investors to favor AT&T (NYSE: T) a traditional dividend paying stock, over shares of its iPhone partner Apple Inc (NSDQ: AAPL). legacy. Rather, AT&T’s communications business generates steadily growing revenue and cash flow needed to sustain a rising stream of dividends. Apple’s depends on staying ahead in an extremely competitive and cyclical industry—the very antithesis of a business model that supports reliable dividends.

To be sure, Apple has had a great deal of success in recent years selling Internet-connected devices. That’s reflected in the company’s end-2013 cash balance of better than $14 billion, a sum that could fund numerous stock buybacks and dividend increases.

History is clear, however, that technology companies don’t stay ahead without constantly innovating. And the larger a company grows, the more it has to spend to keep its lead.

Apple is going to sell a lot more iPhones, iMacs, iPads, iTouches and other devices yet to be revealed. But the best use of its cash is to advance its business—not returning it to shareholders. It can pay a larger dividend and management may indeed elect to. But the higher its payout, the greater the risk grows to the long-run fortunes that ultimately drive its returns.

Moreover, Apple’s entire full-year cash dividend of $12.20 per share was less than a quarter of its stock’s trading range this week. It’s basically incidental to returns.

In retrospect, Verizon Communications (NYSE: VZ) would have provided a more impressive contrast. And thus far since my call, the AT&T/Apple battle has been mostly a race to the bottom.

Income investing, however, is a long-term game. And reported fourth quarter results for both companies clearly make the larger point of AT&T’s greater stability, and therefore greater suitability as a dividend stock for income investors.

The company did feel some impact from the aggressive marketing of number four US wireless provider T-Mobile USA (NSDQ: TMUS). AT&T, however, still added more than 2 million users for its wireless and wireline services. The company’s rate of customer losses fell to a record low. And belying forecasts of smashed margins from competition, earnings rose 20.5 percent excluding one-time items.

We’ll know more February 25 when earnings are released just how much aggressive marketing has affected T-Mobile’s bottom line, and whether being an “uncarrier” is really a sustainable strategy. Certainly, parent Deutsche Telekom. (Germany: DTE, OTC: DTEGY) is still trying to cash out by pushing a merger with Sprint (NYSE: S).

The parties have apparently arranged up to $30 billion in debt financing for a potential deal. The biggest hurdle is the Federal Communications Commission, which apparently is still fixated on having four US wireless competitors.

In any case, fourth quarter numbers at AT&T clearly paint the picture of a business that’s steadily growing despite competitive headwinds. And with the company still spending $20 billion a year on its network—several times T-Mobile and Sprint combined—there’s a clear path for maintaining dominance.

In contrast, it’s not at all clear from Apple’s latest numbers how it’s holding up competitively. The company sold a record number of devices. But it failed to get any meaningful headway in global market share. In fact, the company appears to be losing ground in what it hopes to be its largest market, as Chinese flock to locally developed devices such as the “Coolpad.”

That comes with the territory when you invest in a sector where someone is always building a better mousetrap. But it’s definitely not what you look for when you buy a stock for steady growth and dividends.

Southern Comfort

Already own AT&T? Here’s another alternative to Apple: Southern Company (NYSE: SO).

The Georgia-based power company also released its fourth quarter and full year results this week. And as has been the case year after year, the numbers clearly show the kind of reliable growth needed to fuel more dividend growth.

Reported or “headline” earnings per share were hit as expected from a 3 cents per share non-cash write off of construction costs for the state-of-the-art Kemper coal gasification power plant in Mississippi. The plant will burn “dirty” but cheap lignite coal from an adjacent mine, though not before essentially stripping out virtually all pollutants including carbon dioxide. Start up is expected later this year.

Stripping out the charge, Southern’s fourth quarter net rose to 48 cents a share from 44 cents a year ago. Among the key catalysts were continued successful capital spending–including for two new nuclear reactors of the AP 1000 design–and a 4.8 percent increase in sales to industrial customers.

The latter is part and parcel of the growth of America’s new industrial heartland in the Southeast US. And it promises a multiplier effect for overall sales of electricity from regional economic expansion over at least the next several years.

Solid regional growth is ultimately the best possible guarantee of continued strong regulator relations. That’s the key to earning a fair return on some $17 billion in planned capital expenditures the next three years, which in turn is the critical factor for Southern’s continued growth of earnings and dividends.

Southern has traded at something of a discount to other utilities over the past year. Ironically, the main reason has been concern about its CAPEX budget.

These results and the accompanying information should go a long way toward easing these concerns. It may be a while before Southern shares acquire the premium valuation they’ve held historically, particularly given misguided fears about interest rates and solar power (the utility is already a major producer). But results like these make it only a matter of time. And meantime, investors have an ideal time to build positions in one of America’s most reliable companies. Buy Southern.

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ABOUT ROGER CONRAD

Roger S. Conrad needs no introduction to individual and professional investors, many of whom have profited from his decades of experience uncovering the best dividend-paying stocks for accumulating sustainable wealth. Roger b