- Southern Company's performance this year has been way better than Duke Energy's and the trend could continue.
- Southern has better profit margins, a better payout ratio, a better dividend yield, and a better valuation than Duke.
- Southern is making good progress in the business, and its various projects should continue adding to shareholders' returns in the long run.
Southern Company (NYSE:SO) and Duke Energy (NYSE:DUK) are two utility companies that investors can consider buying. However, Southern looks like a better bet over Duke due to certain reasons. Let's take a closer look at Southern's business and see why it is a better buy than Duke.
Southern Company is up 10% this year, better than Duke's appreciation of 6.6%. Southern reported robust results for the first quarter, with considerable growth in both revenue and earnings. It is one of the few companies that benefited from an extreme weather, which was one of the key drivers behind its growth. In addition, the revival in the economy boosted its numbers.
Southern has seen solid growth in its customer base and usage in residential areas. But, as demand for energy increases, natural gas prices can become volatile. But, Southern Company has managed to save more than $100 million on fuel costs by taking advantage of fuel optionality. As such, the company has been able to successfully negate the effect of volatile prices.
Coming to its projects, Southern has two major projects under its sleeve, namely Plant Vogtle in Georgia and the Kemper County energy facility in Mississippi. Its Vogtle plant, which is a nuclear project, continues to progress at a fast pace and construction remains on schedule. Moreover, the company was also able to bag America's first loan guarantee for nuclear construction from the Department of Energy, which will reduce its financial risk and also benefit customers.
Southern is also moving ahead with its Kemper project, where construction is almost over and it is ramping up its start-up activity. In fact, it has scheduled the heat up of the first gasifier for mid to late summer. But, it is facing some challenges in the face of adverse weather, labor turnover, and inefficiencies. Consequently, it will have to bear an extra charge of $380 million, which will bring the total shareholder loss on the project to around $1.6 billion.
Although the Kemper project is an initiative towards clean energy, but because of the delays and construction problems, its cost has surged. Moreover, the project has already been delayed by one year. In addition, concerns are being raised whether this huge amount of money spent at Kemper is worth it or not. But, according to Southern management, "All costs incurred in the construction of Kemper is prudent."
In renewable energy, Southern Company is making its mark. It has recently completed the 20 MW Adobe Solar Facility, which is its second solar power plant in California. Thus, the total solar portfolio of the company stands at 222 MW. Management expects this momentum to continue with more solar power projects in the future.
Going forward, management is positive about the prospects of the business. Southern Company is focused on providing clean, safe, reliable, and affordable energy to its customers, and believes that this will be the driving force behind the business.
Better than Duke
In addition, Southern Company is also focused on increasing its shareholders' value. As a result, management has decided to increase its common dividend by around 3.5% to $2.10 per share, taking the yield up to 4.70%. In fact, this is the thirteenth consecutive year that Southern has raised its dividend. This also points out the strong fundamentals of the business. In comparison, peer Duke Energy sports a dividend yield of 4.30%. The gap between Southern and Duke will appear wider when we consider their payout ratios.
Southern has a payout ratio of 94%, while Duke's payout ratio stands at 114%. So, Southern can raise its dividend much more easily than Duke. In addition, Southern's profit margin of 10.7% is way better than Duke's 7.83%, and the same can be said regarding the return on equity. Southern's return on equity stands at an impressive 9.74%, while Duke's is low at just 4.73%.
A better valuation
From a valuation point of view as well, Southern looks like the better buy. Currently, it has a trailing P/E of 21, and its forward P/E looks even better at 15.8. This indicates that its earnings will increase in the future. On the other hand, Duke is much more expensive at almost 27 times earnings. As such, it is clear why Southern looks like a better investment of the two, and investors should consider buying it over Duke.
Although there are challenges with the Kemper project, but management is taking all the necessary steps to offset its negative effects. Hence, investors can consider adding Southern Company to their portfolio.
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.