A lot has happened in the markets in the past two weeks.  From the biggest one week drop in history two weeks ago, to the best day in history on last  Monday.  Then, just as things appeared to have calmed down with a relatively mild day on Tuesday, the Dow suffered an 8% hit on Wednesday.  I’m sure that if you are reading this article, you have most likely been following the markets and are well aware of all of this already. So, I am not going to go into further detail in this article but rather try to propose a stock that I feel is a safe play in this ridiculously volatile and risky market.  That stock is The Southern Company (SO: 36.23, 0.00 (0.00%)).  I have written before about strong value plays with high dividends and why I like them so much at the moment, and that is exactly what I am going to do again in this article.

The Southern Company is one of the largest electricity producers in the United States.  It is based out of Atlanta, GA and operates exclusively through its subsidiaries.  Southern Company owns all of the outstanding stock of Alabama Power, Golf Power, Georgia Power, and Mississippi Power.  These companies supply electricity to customers in the Southeastern region of the United States.  Southern Company also owns all the common stock of  Southern Power.  In total, The Southern Company has over 41,000 megawatts of generating capacity and distributes to approximately 4.3 million customers.

Current Economy

Any time that a discussion of electric utilities is brought up, it is important to look at the current situation in our economy.  As it has been discussed many times before, electric utilities have a tendency to be negatively related to the price of commodities.  When fuels that are used for electricity generation increase in cost, electric utilities are going to have lower profits.  This is the simple idea behind the spark spread (a measure that is used to compare the market price of electricity to the cost of its production).  Both natural gas and coal have fallen significantly in the recent months, which should in turn lead to higher profits for electric companies all things being equal.  That’s not to say that it definitely will move in this fashion because there are obviously a number of other factors that need to be considered.

One of these risks is the current state of the economy.  The credit crisis that has swept our nation is going to continue to increase the number of foreclosures on homes.  In theory, this could affect the companies that supply them with basic utilities such as water and electricity.  Apart from this, the most obvious risk is what will happen when natural gas and coal rebound.  This will increase the cost of production for electric companies.  It is hard to speculate when this will happen, so I do not expect it to have a negative impact on Southern’s growth moving into the future.

Financials

There are many reasons why I like The Southern Company so much, but one of the most important is its sound financials.  Below is a list of the financial metrics and ratios that I feel make this company stand out:

• Market Capitalization - $25.01 billion
• Beta - 0.39
• Trailing P/E - 15.78x
• 2008E P/E - 14.02x
• 2009E P/E - 13.28x
• Return on Equity - 14.18%
• Dividend Yield - 4.69%

The first number that I would like to highlight is its market cap of $25.01 billion, which makes it the largest electric utility in the United States.  In a market such as the one that we are currently in, I do not want to touch upon small cap growth plays, because they are extremely unpredictable.  I think people have already been scared enough in the last few weeks to risk taking a gamble in one of these companies.

Southern is a large cap with a proven track record of constant returns.  On top of this, it sports a Beta of only 0.39.  Low Beta and large cap are exactly what we should be looking at in times like these.  I know that Southern’s trailing and forward P/E numbers may be misinterpreted because of the price hit the whole market has taken recently, so I think it is more important to look at its growth moving into the future.  Its estimated EPS numbers for 2008 and 2009 are 2.33 and 2.46, respectively, up from 2.28 in 2007.  It is fair to expect this growth, as the Southern Company has had steady EPS growth in four of the last five years.  The final number and perhaps the most attractive of all these is its Dividend Yield of 4.69%.  A dividend this high in a market as unstable as ours makes this stock jump out immediately.  You can rely on Southern to remain stable and to provide us with as much of a “safe” play as there is in the market right now.

So What To Do

The Southern Company is exactly the type of company that needs to be considered at a time like this.  It has had a steady history, strong growth moving forward, and a huge dividend.  It will be interesting to see how successful they have continued to be when they announce earnings on Thursday, October 23rd.  If it is a favorable result, then I think it will become increasingly difficult to ignore this company any more.