The Southern Company – and Other Utilities

The Southern Company started 2004 with a valuation of $33 a share. It has paid 41 dividends in the last ten years and currently has a dividend yield of just less than 5%. Its quarterly dividend has crept up from 35 cents a share a decade ago to 50 cents share today. A threat to the value of this stock is the prevailing interest rate. When the Fed started talking about reducing the quantitative easing stimulus program in May of 2013 interest rates went up a bit and the value of the Southern Company fell from its peak of $48 to its current value of $40 a share. As the Fed backs off of its stimulus program we can expect to see interest rates go up farther and we can expect to see the price of Southern Company stock fall farther. However, the dividend that this utility pays comes from a very stable business that will not suffer unduly if the Fed backs off its stimulus program as the economy improves. If the stock falls another $10 a share it will be paying a dividend of more than 6%. Our belief is that The Southern Company belongs in your list of possible stock picks for 2014, once interest rates rise and the market falters.

Here are a few more utilities to consider:

Other factors to consider when including utilities in your stock picks for 2014 are that these are largely recession proof stocks. If things go bad in China, people in the USA still need electricity for their homes. Energy costs have gone down with the advent of sustainable fracking technology which fact benefits all utilities.

What Constitutes a Vulnerable Stock?

Your stock picks for 2014 should not include vulnerable stocks. A time honored way to pick stocks is to look a recent profits and quality of management. A contrarian view is to look at the strength of a brand name. For example, Coca Cola can make a lot of mistakes and even have a bad quarter and the entire world still recognizes and wants a Coke. Microsoft is not growing rapidly but it is an institution that is largely recession proof. On the other hand Apple is riding a wave of success and needs to pull a magic rabbit out of the hat every year to stay on top. Consider these thoughts when choosing Coca Cola – KO, Apple – APPL or Microsoft – MSFT for your stock picks of 2014. And, by the way, there is nothing wrong with investing in beer or other things that people consume during both good and bad times!

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As AOL sells its patents to Microsoft a couple of thoughts come to mind. An interesting part of the current surge of patent acquisitions is that it is more effective than buying an entire company. In the world of mergers and acquisitions one company commonly buys another, in return for its own shares, in order to obtain patent rights, a market, or a product that it prefers to buy instead of develop. Mergers and acquisitions commonly include layoffs, sales of “excess” assets, and a lot of reorganization. Buying patents, as AOL sells it patents to Microsoft, may well be more cost effective than when Google picked up Motorola Mobility. Microsoft is not picking up a new business to manage. It is simply making good use of its cash trove and bypassing years of R&D in order to have in hand the rights to intellectual property necessary for its own search engine, advertising, and content generation business. For the investor interested in either of these companies, which becomes a good stock investment based upon this deal?

Obviously, AOL was a great stock to invest in last week, if one had known about the deal. As AOL sells its patents to Microsoft its stock price has risen consistent with its new pile of cash. We have written before about investing in Microsoft patents. Microsoft has lots of cash so if a billion or so is missing no one will really notice. What is pertinent here is that Microsoft is both gaining patents and limiting the rights of other companies to use the same ideas. The problem for other companies who want to develop similar applications is this. They need to develop from scratch. They also need to research the patents of Microsoft, Google, and others in order not to inadvertently use a “too similar” solution of a programming problem. If they do they are likely to be sued by the likes of Microsoft, Google, or others. In a world where Motorola sells out to Google and AOL sells its patents to Microsoft, the possession of patents amounts to an income stream as other software developers opt to purchase patent rights instead of trying to develop new software for old applications using laborious “work arounds” in order to avoid expensive and potentially ruinous lawsuits in the future.

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How does a prudent investor approach stock investment in a volatile market like we see today? There are a number of long standing caveats to investing. First and foremost smart investors diversify their holding and thereby limit their investment risk. Investors typically pick several market sectors and purchase a stock in each sector. Because different market sectors react differently to changes in the economy the stocks in these sectors will often balance each other out. For example when oil prices go up big oil stocks will rise as well. At the same time many industrial and transportation stocks will fall in value. When oil prices fall so will oil stocks but airlines, railroads, automakers, and steel producers will commonly prosper. One of the basics of learning how to invest is to learn how to develop and balance a stock portfolio.

Dividend stocks are often a good way to maintain income in a volatile market. Stocks like Microsoft – MSFT, Boeing – BA, and Cisco – CSCO, all provide dividends to their shareholders and are substantial companies with a vanishingly low risk of going out of business in tough economic times. As the staggering debts of the EU and the USA draw down economic growth we can expect to see slower returns in the general stock market. Dividend stocks that have been paying routinely for half a century or more are a good bet going forward. In many cases the primary return for the investor may turn out to be dividends.

With the US debt expected to remain high for years and with debt and growth so closely intertwined it is hard to see how the broad range of stocks will appreciate very rapidly in years to come. However, there still are growth stocks. Biotechnology, for example, has barely scratched the surface of possible new ways to improve health, increase food production, and prolong life. One can invest in the giants of the industry such as Roche – RHHBY(owner of Genentech) or any number of small startups with promise. However, to invest in this sector investors need to do their homework in order to understand just what these companies do, what products they are developing, the timeline of getting medications approved by the FDA, and the potential profitability of new products. This sort of stock investment in a volatile market bypasses economic concerns and goes to the heart of whether a company can develop and maintain a profitable product or not.

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How can you decide about your investment?

If you are in a financial crisis, you must be facing multiple problems. On one hand you must be losing your mind as your portfolios are going down the drains, on the other hand you must be quite desperate to replenish your funds that are diminishing. However, you should keep in mind that since you are already facing trouble with your mortgage, you cannot afford to experiment in a volatile environment. Hence if the market is unsteady it is better that you go for a long term investment, say up to a period of 5 years where the chance of making money will increase. Short term investments are designed in such a way that they will show a significant yield within a short span of time. Long term investments, on the other hand, would last for a number of years but show a steady increase so that the yield at the end of the term becomes quite significant.

What are the advantages and disadvantages of short term investment?

The biggest advantage of a short term investment is that it gives a fast growth. With a term ranging from a few weeks to a few months, short term investment can give you almost ready cash. Even though short term loans tend to fluctuate quite a lot, it will allow you to have more control over your money since it is not out of your possession for a long period of time. Along with the above advantages, there are several disadvantages too. Usually short term investments tend to be quite risky and show heavy fluctuations when compared to their long term counterparts. There is chance that you will lose money in short term investment as much as there is chance to make money. This is more applicable when you are dealing with stock market as most of the short term investments made with stocks and bonds involve precise timings in order to sell stocks or bonds at their peak value before they start falling.

What are the advantages and disadvantages of long term investment?

These are the opposite of short term investments and they possess the ability to gain small amounts of money steadily over a longer period of time. The pace of the long term investments facilitate a greater degree of stability and much lower risks as compared to short term investments. These are also ideal for making your retirement savings by investing in funds. These investments keep growing over the years and mature when you need them. there isn’t much prevalent disadvantage of long term loan apart from the fact that their growth is slow over the years.

Thus it can be said that, if you want a high yield in a short span of time, long term investments are not your thing. In fact, sometimes long term investments can decrease in value before they rise if you consider the fees that are associated and the small fluctuations that are bound to occur. However, with short term investment it might not always pay off and you may not even get the little money that you can from long term investment. Thus it is your call whether you choose risk over stability.

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