News Analysis date published New: 
Monday, August 22, 2011 - 08:00
New Date created: 
Monday, August 22, 2011 - 08:00
New Date last updated: 
Monday, August 22, 2011 - 08:00

A Safe Stock for an Insane Market

Monday, August 22, 2011 8:00 AM

Has the market gone off its rocker? One day the Dow Jones Industrial Average is down 500 points and the next day it's up 500 points. Then it's down 600 and up 400, and so on.

It's easy to spend all day trying to explain the market's latest bout of insanity, but why bother? No amount of explaining will change anything. This is the way the market is, and I think there's plenty more instability to come for at least another year.

The best thing investors can do is shield themselves as much as possible from this volatility with investments that don't take such wild rollercoaster rides. To me, this means gold investments are out. Although the "yellow metal" is widely considered among the safest of safe havens, it can be just as volatile as stocks. And like the chart below shows, gold has been showing signs of instability recently.

You might also remember what happened to gold between 1980 and 2005. After topping out at $850 an ounce in 1980, the price rapidly eroded during the following several years to about $300 an ounce. From then on, it kept bouncing between $300 and $500 an ounce. Gold turned out to be a huge disappointment for an entire quarter century, especially for those who bought the metal during the 1980 peak. This doesn't sound like a safe investment to me -- I even think the same pattern could easily happen again when the economy recovers and stocks rebound, say in about a year.

But despite these uncertain times, the stock market still offers stronger safe havens than gold. Case in point: shares of Southern Co. (NYSE: SO), a leading provider of electricity to the Southeast United States.

Shares of the Atlanta-based utility have been noticeably less volatile than the broader market -- and they're typically almost 70% less volatile over time, as the stock's beta of 0.31 indicates. Beta compares a stock's price movement to that of the overall market. A value of 1.0 means the stock moves in line with the market, so a value of 0.31 means Southern Co.'s stock is 69% less volatile than the market.

Analyst Mark Barnett of Morningstar nicely captured the essence of this when he called the stock "an attractive investment for those seeking dividends and capital preservation." Since it's not often that a stock is recommended for capital preservation, I turned my attention to it. Here's what I found…

One of the main reasons Southern Co. is such rock-solid stock is its traditionally good relationship with state regulators. And being in good terms with the government never hurts when a utility company seeks rate increases, as was the case last December, when Georgia's utility regulators approved a 10% rate increase for Georgia Power, the biggest of the four utilities owned by Southern Co. The rate increase at Georgia Power will be spread over three years. This way, the monthly bill for the typical Georgia Power customer will rise an additional $10.76 in 2011, $13.84 in 2012 and $15.32 in 2013. This means Georgia Power's net revenue should increase by about $568 million in 2011, $731 million in 2012 and $809 million in 2013.

Of course, a major contributor to Southern Co.'s stability is the business it's in; everyone uses electricity after all. Plus, the company dominates a massive area, delivering power to more than 4.4 million mainly residential customers in Alabama, Georgia, Florida and Mississippi. As a provider of electricity, Southern Co. is second in the United States only to Exelon Corp. (NYSE: EXC), which has 5.4 million customers throughout the country and a strong presence in the Midwest and mid-Atlantic regions.

Another important point is that the population in Southern Co.'s service territories has been growing. This has led to a steady growth in the company's customer base, which has expanded 1.7% annually for the past decade. At this rate, Southern Co.'s customers could reach 5.1 million by 2020. The company has already started to prepare for the possibility of increased future demand by building new facilities. It has a $2.4 billion natural gas-producing plant scheduled for completion in Mississippi in 2014 and a $6.4-billion expansion of nuclear-power facilities in Georgia that's expected to be finished in 2017.

Another key factor in Southern Co.'s safety is the dividend, which has either remained stable or risen for 242 straight quarters, or more than 20 years. The stock now pays $1.89 a share for a yield of 4.7%. Analysts predict the dividend will continue to rise by an average of 4% annually through 2016, with the support of steady earnings growth and lower construction, maintenance and compliance costs relative to its peers.

Action to Take --> Southern Co. is a great stock for safe-haven seekers, but even a stock with such strong fundamentals faces some uncertainty -- mainly because of the potential cost of complying with any new regulations related to environmental control, infrastructure upgrades or other aspects of plant operations. However, such costs aren't likely to be too burdensome. Analysts say regulators will probably let Southern Co. pass most of these costs on to customers.

Because of all of these reasons, I'm confident the stock will continue to be a beacon of sanity in this completely crazy market. I strongly recommend it as a safe haven for your investments.

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Tim Begany does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.