This Is Why You Should Consider The Southern Company: A Utility Stalwart

Jun.14.13 | About: Southern Company (SO)

Southern Company (NYSE:SO) has a strong dividend yield of 4.6%, an impressive return on equity of 12%, favorable forward P/E of 15.4x, and a low PEG of 3.3 as compared to its peers. The company has posted satisfactory and healthy financial performance in the past. Therefore, I am bullish on the stock.

In the industry, SO is among the best regulated utility companies. The company earnings are primarily driven by regulatory operations. SO has maintained premium position within the industry with above average ROE of 12% as compared to industry average ROE of 10.25%. Moreover, SO owns a low cost generation fleet that has led to lower rates that the company charges to its customers.

The company has several investment opportunities across its operating segments, including opportunity at traditional utility front, in new generational fleet and spending on environmental retrofits mandated by the EPA.

Financial Performance

The company has been consistently delivering healthy financial performance in the recent past. For the 1Q 2012, adjusted earnings per share were $0.49 in line with the analysts' consensus, and up $0.07 as compared to corresponding period last year. The factors that led to improved EPS for the quarter were rate increases and favorable weather conditions.

Gross margin improved 3% YoY for the company in the recent quarter, mainly driven by favorable weather conditions. Reported operating profit for SO was $865 million, up 13% YoY, driven by higher gross profit and partially offset by increase in O&M expenses of 0.7%.

In the most recent quarter, SO took a write down on the Kemper County IGCC unit amounting to $333 million. This was mainly due to higher piping and labor costs than previously projected by the company. The increase in labor costs are expected to speed up the construction of the project, which is expected to be complete by May 2014. It is crucial for the company to complete the project by the expected date; otherwise it may lose approximately $130 million in tax credits per year, over the life of the project.

SO is also in the process of building two new reactors, Plant Vogtle Unit 3 and 4. The cost for these two units is estimated to be $14 million. The cost of these two units is significant and poses a risk for the company that can arise due to unexpected costs and delays.

Dividend

SO offers a high dividend yield of 4.60% and annualized dividend rate of $2.03 per share. SO has a rich dividend history with consecutive quarterly dividends since 1948. Also, the company has increased quarterly dividends for the 12th straight year. The table below shows annualized dividends and payout ratio for the company over the recent years.

2008

2009

2010

2011

2012

2013*

Dividend (Annual)

$1.66

$1.73

$1.80

$1.87

$1.96

$2.03

Payout Ratio

70.5%

75.5%

76%

73%

73%

-

Click to enlarge

Source: Company Reports

Conclusion

SO

CenterPoint Energy, Inc. (NYSE:CNP)

Duke Energy Corporation (NYSE:DUK)

Average

Forward P/E (based on 2014 EPS est.)

15.4x

17.6x

14.7x

16x

PEG

3.3

4

3.8

3.7

Five years growth rate

4.8%

4.8%

4%

4.50%

ROE

12%

9.6%

6.5%

9.30%

Dividend Yield

4.6%

3.5%

4.5%

4.2%

Click to enlarge

Source: Yahoo finance

SO offers a good investment opportunity for the investors as the company has stable and healthy earnings. Also, the company has a cheap forward P/E of 15.4x as compared to its peers' average of 16x and has a low PEG of 3.3 than its peers. Furthermore, SO has attractive next 5 years growth rate, ROE and dividend yield in comparison to its peers. These valuation characteristics make me bullish on the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.