Is Southern Company Still A Good Buy?

| About: Southern Company (SO)

Summary

Southern Company has put in a strong performance this year on the back of improving results, and has hiked its dividend for 13 consecutive years.

Southern is investing aggressively in improving its capacity in order to satisfy an expected increase in demand, which is expected as a result of improving economic conditions.

Southern's focus on solar projects, along with robust demand and capacity upgrades, should help it sustain its terrific financial performance and dividend growth.

Up almost 8% so far this year, Southern Company (NYSE:SO) is beating the broader market. The public electric utility company's performance has been driven by its smart strategies and favorable weather conditions. For example, in the recently-reported first quarter, Southern beat expectations on both revenue and earnings handsomely, on the back of the harsh winter weather seen in the U.S. earlier this year, along with growth in residential and industrial sales.

Additionally, Southern is a consistent dividend payer. The company has hiked its dividend for 13 successive years, and carries an impressive yield of 4.80%. Now, there is a good chance that Southern will be able to pay out a solid dividend in the future as well, since it is seeing terrific growth in revenue and earnings.

Terrific results point toward improvements

In fact, in the first quarter, Southern's revenue increased 19% from last year to $4.64 billion, beating Wall Street's $3.84 billion estimate. Also, on a non-GAAP basis, Southern earned $586 million, or $0.66 per share, during the first quarter, as compared to $430 million, or $0.49 per share, in the year-ago period. Moreover, a look at the company's strategies indicates that it will be able to sustain its terrific performance going forward.

Southern Company is focused on providing clean, safe, reliable, and affordable energy to its customers. As a result, its crew worked tirelessly during harsh weather conditions to restore power to nearly 800,000 customers affected by the severe ice storm in mid-February. Moreover, Southern dispatched a diverse fleet that helped it deliver more than $100 million in fuel cost savings by taking advantage of its fuel optionality. This was important considering the volatility in natural gas prices due to the strong weather-related demand and delivery challenges.

So, the company was able to fulfill its customers' needs, and at the same time, it also managed to reduce its costs.

Increasing capacity to address demand

Southern is seeing an improvement in the economy. Nine out of Southern's 10 largest industrial sectors, which account for approximately 80% of industrial sales, reflected positive year-over-year growth in the first quarter, and all 10 of them were positive in March. In addition, the company is witnessing solid customer growth and usage growth in its residential class, and this has made it increasingly confident in the sustained momentum of the Southeast economy.

To satisfy the growing demand, the company is aggressively investing in infrastructure. Southern Company has construction-under-progress at Plant Vogtle Units 3 and 4 in Georgia, and at the Kemper County energy facility in Mississippi. It is making fast progress in the construction of the Vogtle project, which is on schedule to go online in the fourth quarter of 2017 and the fourth quarter of 2018 for Units 3 and 4, respectively.

The power major has also successfully executed the heaviest lift to-date by placing the 2.2 million pound CA20 module into the Unit 3 Nuclear Island. Its critical path focus remains on the major elements of the Unit 3 Nuclear Island, with the CA05 module expected to be installed in the second quarter.

The company is also winding down construction and ramping up its start-up activity for the Kemper project. As such, it is working toward its next major milestone, the heat up of the first gasifier, which is now scheduled for mid to late summer.

Additionally, management expects to place the combined cycle portion of the plan into commercial operations this summer. The start-up activity for the combined cycle is largely complete, as mentioned in the last quarter, and is expected to be able to serve customer's energy needs during the upcoming peak season.

So, Southern is aggressively upgrading its capacity and this should help it satisfy demand going forward. As a result, there is a strong chance that Southern will be able to sustain its outstanding revenue and earnings performance.

Focus on other areas of capacity generation

Southern is also focusing on innovative ideas to improve power generation and address the growing demand needs. The company is confident regarding the value of the TRIG technology, and the entire Kemper project to Mississippi Power's customers. So, it is completing the construction of a first of a kind plant, and working through instrumentation and controls integration that is critical for the project's success.

Southern Power is expanding its generation portfolio by way of solar power. It recently completed the 20 megawatt Adobe Solar Facility, which is its second solar plant in California. This has expanded Southern Power's solar portfolio to approximately 222 megawatts, and the company claims to have quality, long-term contracts for these projects. Southern also plans to announce another solar acquisition going forward.

Valuation and takeaway

The trailing P/E and forward P/E ratios of 20 and 15, respectively, signify strong earnings growth going forward. Moreover, Southern's expected earnings CAGR for the next five years is 3.35%, much better than the industry's average of just 0.36%. Also, since Southern is a utility company, it pays out a solid dividend, which looks set to increase in the years ahead because of the company's robust financial growth and improving cash flow.

In the last one year, the company has generated operating cash flow of $6.46 billion, and since its earnings are expected to improve in the next five years, there is a strong probability that the dividend might increase. So, investors should remain invested in The Southern Company as it looks like a solid long-term bet.

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