The Southern Company (NYSE:SO) is a holding company which owns all of the common stock of the traditional operating companies, including Alabama Power, Georgia Power, Gulf Power, Mississippi Power and Southern Power along with other direct and indirect subsidiaries. On July 31, 2013, the company reported second-quarter earnings of $0.66 per share, which missed the consensus of analysts' estimates by $0.02. There is nothing sexy about any utility company other than its high-dividend yield. The stock is down 9.57% in the last year and is losing to the S&P 500, which has gained 15.84% in the same timeframe, and with that in mind I'd like to take a moment to evaluate the stock on a fundamental, financial and technical basis to see if it's worth initiating a new position in the stock right now for the utility sector of my dividend portfolio.
The company currently trades at a trailing 12-month P/E ratio of 20.99, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 14.65 is currently inexpensively priced for the future in terms of the right here, right now. Next year's estimated earnings are $2.84 per share and I'd consider the stock inexpensive until about $43. The 1-year PEG ratio (5.63), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on a 1-year EPS growth rate of 3.73%.
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 4.88% with a payout ratio of 103% of trailing 12-month earnings while sporting return on assets, equity and investment values of 2.8%, 9.5% and 7.7%, respectively, which are all respectable values but nothing to go writing home about. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 4.88% yield of this company is good enough for me to take shelter in for the time being if initiating a new position in the stock. The company has been increasing its dividends for the past 12 years at a 5-year dividend growth rate of 4%.
Looking first at the relative strength index chart [RSI] at the top, I see the stock muddling around in middle-ground territory with a value of 51.48 but with upward trajectory, which is a bearish pattern. To confirm that, I will look at the moving average convergence-divergence [MACD] chart next and see that the black line is above the red line with the divergence bars increasing in height, indicating the stock has upward momentum. As for the stock price itself ($41.57), I'm looking at $42.55 to act as resistance and $40.22 to act as support for a risk/reward ratio, which plays out to be -3.24% to 2.36%.
- Recently Jim Cramer endorsed the stock saying that it has a long-term history of paying the dividend through the toughest times.
- The company will withdraw its request to raise the budget to construct two nuclear reactors in Georgia.
- The company entered into agreements with Barclays (NYSE:BCS), BNY Mellon (NYSE:BK), Citi (NYSE:C), and Merrill Lynch (NYSE:BAC) to sell them stock from time to time with the amount of stock sold not to exceed 15 million shares.
Whenever there is talk of interest rates rising, there is bound to be a hurtin' put on the utility stocks. If interest rates do rise, I would not doubt that the analysts will begin to downgrade these companies. Southern Company is inexpensively valued based on future earnings but extremely expensive on future growth. Financially, the dividend payout ratio is very high based on trailing 12-month earnings. The technical situation of how the stock is currently trading is telling me we might be seeing some upward pressure in the immediate future. The stock has mediocre financials, no growth prospects, more debt than I like to see, and for these reasons, I will stay away from the stock for now.
Disclaimer: These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing.
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.