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Forget Southern Company, Here's A Utility With Double The Total Return Potential That's Also 28% Undervalued


  • Regulated utilities have long been a staple of high income portfolios.
  • Southern Company is one of the largest and most popular high-yield utilities, thanks to its safe business model and slow but steady dividend growth.
  • However, there are plenty of other great utilities, including NextEra Energy Partners.
  • Learn why this best in breed renewable energy utility is set up to crush not just most other utilities but the market as well in the coming years and decades.
  • But also what risks investors need to keep an eye on.

I'm a huge fan of utilities (3rd largest sector in my portfolio), thanks to their secure and steadily growing dividends.

That being said, the downside to this industry is that the biggest and most popular names, such as Southern Company (NYSE:SO), have relatively slow growth prospects.

Combined with declining yields in the past few years, courtesy of record low interest rates, this means that future total return potential from this industry is generally sub par.

Of course, that doesn't mean there aren't some much faster growing, exceptional high-yield, dividend growth opportunities.

Let's take a look at why income investors considering Southern Company might want to consider NextEra Energy Partners (NYSE:NEP), the gold standard of renewable energy yieldcos instead.

Southern Company: Solid Investment But...

Source: Simply Safe DividendsSource: Simply Safe Dividends

Southern Company has become known for its slow but steady dividend growth, which has helped it to generate strong, peer and market-beating total returns over the long term.

Source: Southern Company

Of course, in the last few years, shares have lagged both its utility peers and the S&P 500. However, management has a plan for turning things around.

Source: Southern Company Investor Presentation

The key to Southern's long-term strategy is to diversify into faster growing businesses but only those backed by long-term, fixed contracts.

Midstream Base Rate Growth

For example, as you can see, Southern Company expects to receive regulatory approval for 2.6% annual growth in its electric base rate.

However, thanks to the company's aggressive push into the midstream gas segment (pipelines), it can tap into a much faster growing market, one powered by America's fracking revolution and the continuing boom in natural gas production.

Source: Enterprise Products Partners

Combined with the company's planned $22 billion in growth investment through 2021, Southern Company believes it can achieve much stronger than average EPS growth, which bodes

This article was written by

Dividend Sensei profile picture

Dividend Sensei (Adam Galas) is an Army veteran and stock analyst with 20+ years of market experience.

He is a founding author of the investing group The Dividend Kings which focuses on helping investors safeguard and grow their money in all market conditions through the highest-quality dividend investments. Dividend Sensei and the team of analysts (Brad Thomas, Justin Law, Nicholas Ward, Chuck Carnevale, and Sebastian Wolf) help members invest more intelligently in dividend stocks. Features include: 13 model portfolios, buy ideas, company research reports, and a thriving chat community for readers looking to learn how to invest more intelligently in dividend stocks. Learn more.

Analyst’s Disclosure: I am/we are long NEP. 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (227)

mjtroll1 profile picture
I was stopped out of SO with close below 45.81 ...the SO/SPY pair has "rolled over" and I would now expect SO underperformance
mjtroll1 profile picture
regarding SO

The SO/SPY pair has broken below its recent trading range.. the pair seemed IMHO to have bottomed and actually looked like it broke out in april .. am long with stop close below 46.4
Dividend Sensei,

Just curious! why are these 3 Californian utilities not commonly discussed: SRE PCG and EIX? Are these bad long term investments relative to NEE/D/SO/DUK? Where do you see greatest opportunity among these three - SRE PCG and EIX? Thanks
IMHO SRE is the only one worth owning. I own a small amount. All three have low growth rates as well as low dividends. Not a good combination. I strongly prefer NEE, D, SO, SEP, WEC and especially NEP. The California PUC is not generous with rate increases so California utilities will always have poor overall results.
Dividend Sensei profile picture
I'd say that yes, realtive to NEE, D, and SO, those California utilities offer weaker total return potentials.

That being said, SRE is by far the best of the bunch, especially after just snatching up Oncor from the jaws of Berkshire.
Dividend Sensei profile picture
Exactly right.

Don't feel the need to diversify into every region of the country.

California has a lot of issues that will make it challenging for investors to earn decent returns from CA utilities.

The same is true for ED in NYC.

You won't lose your shirt, but you'll leave a lot of money on the table compared to those who buy NEE, WEC, D, SO, not to mention the LP utilities such as BIP, BEP, NEP, and PEGI.
Dividend Sensei,

what are your views regarding NEP vs PEGI? Where do you see better long term investment prospects? Thanks
Dividend Sensei profile picture
So with the latest shake out in the industry, specifically FSLR, SPWR and NRG selling off their yieldCos, I view the yieldCo industry as a 3 stock industry.

NEP is the gold standard, thanks to NEE going even more all into renewable.

BEP is 2nd favorite thanks to BAM's management, and its legendary access to practically unlimited capital.

PEGI is the third, with management rededicating itself and the greater investments from Canadian Pensions.

I own all three and don't see that changing anytime soon.
mjtroll1 profile picture
regarding NEE

The NEE/XLU pair indicates that NEE has been multiyear outperformer.. it however is currently trading 2 sigma rich ...would not be a buyer
Dividend Sensei profile picture
An interesting approach to technical analysis.

Of course as a long-term investor I would still be willing to own NEE because it's just that good.
mjtroll1 profile picture
regarding this statement

I myself plan to move to Florida, when my income is so high that my income tax burden in Minnesota becomes greater than $2000 a month.

I live in Illinois which I thought had a monopoly on worse tax state in nation but I see our state income tax of just under 5% is a steal relative to Minnesota's 7+
Dividend Sensei profile picture

While Minnesota is a beautiful state, with a great standard of living, it's income taxes are some of the highest in the country.

$0 to $25,179: 5.35%
$25,180-$82,739: 7.05%
$82,740-$155,649: 7.85%
$155,650+: 9.85%

Luckily much of my income is not taxable, (VA pension) but if my taxable income ever reaches $300,000, including REIT dividends (which are unqualified) then my state tax bill will hit my $2,000 monthly cap (my family is here so I'm willing to pay this much to live near them).

That would represent an effective tax rate of 8.08%.

From I estimate that, each $1 in taxes, accounting for lost discounted investing potential, is worth about $20.

Thus $24,000 a year in state taxes is really costing about $480,000 a year in lost future wealth (in today's dollars) or $4.8 million over a decade.

Can you put a price on family? Sure, and that's about mine. If I hit that level I'll simply move my family to a Florida, preferably to a sky scraper penthouse in Miami Beach;)
jwadtw profile picture
One aspect not often addressed is that an investment in SO is an investment in the Southeast US economy. All things considered, I think that's a fairly good bet, and the dividends keep on coming.
Dividend Sensei profile picture
Sure. I'm not all that thrilled about Alabama, Mississippi, and Georgia, but they should still grow somewhat.
jwadtw profile picture
Seems to me AL, MS, GA (and SC) are where most new factories are being built. Low cost of living, right to work, sunbelt, etc. I see a much stronger future there than CT, IL, CA, NJ, and other insolvent states.
Dividend Sensei profile picture
Sure, the big blue states are doomed. I'm saying that Texas and Florida are where the big growth is coming.

Which is why NEE has such a bright future, though it's a shame that Oncor acquisition fell through.

I myself plan to move to Florida, when my income is so high that my income tax burden in Minnesota becomes greater than $2000 a month.
mjtroll1 profile picture
ds..tks for comment.. having said that comparing SO to T is akin to picking between the lesser of two evils as both are multiyear underperformers vs their respective indices and to the broader market..
rnsmth profile picture
I am happy to have both T and SO as positions in my portfolio, along with all my other companies that can be seen in my profile.
mjtroll1 profile picture
regarding this statement

I am happy to have both T and SO as positions in my portfolio, along with all my other companies that can be seen in my profile.

I am happy you have them to (and not me)
mjtroll1 profile picture
regarding this statement

That's to be expected. Nothing ever outperforms all the time.
Regression to the mean is natural and a good buying opportunity

nothing every outperforms all time time is hardly the case regarding SO ..we are approaching decade lows indicating multiyear underperformance
regression to the mean is also a mischarterization as current level on the the pair is well below mean and in fact approaching 2 sigma cheap

but nice try in an area in which is clearly not your long suit
Dividend Sensei profile picture
I see your point.

Stocks won't necessarily regress to the mean unless there is a business catalyst.

BUT SO does have solid potential with its long-term growth plan.

In the meantime you get paid 5% to wait.

Not saying that SO is the best utility far from it, BUT it's certainly better than AT&T which is paying the same but with only 2% dividend growth.
mjtroll1 profile picture
regarding SO

the SO/XLU pair has seen SO dramatically underperform since june 2012.. its approaching its all time low in 2006/2007 which I am expecting it to test..
Dividend Sensei profile picture
That's to be expected. Nothing ever outperforms all the time.

Regression to the mean is natural and a good buying opportunity.

Especially if SO hits a yield of 5%, then it's time to back up the truck.
rnsmth profile picture

Well, I bought it in December 213 for forty bucks and change. Those shares are up 16%. I do not call that approaching its all time low in 2006-07. It may be, but I do not call it that.
mjtroll1 profile picture
regarding this statement

Well, I bought it in December 213 for forty bucks and change. Those shares are up 16%. I do not call that approaching its all time low in 2006-07. It may be, but I do not call it that.

timing is everything ..for the rest of us here are the relative annualized returns of SO vs its index

1YR SO -7.9 XLU 15.95
3YR SO 6.16 XLU 9.83
5yr SO 3.84 XLU 14.80
SleepyInSeattle profile picture
SO: sold my shares today. Just a gut feeling/ will repurchase when and if it corrects more. I replaced it with CBLpD, a preferred paying 7.75% - we'll see how it goes.
why would you sell LOW! Thats just crazy! and they are going lower, just buy more!
Dividend Sensei profile picture
I would never trade around a core holding like that, especially based on a gut feeling.

Market can be crazy in the short-term but steady, safe and growing dividends are the lifeblood of long-term wealth.
SleepyInSeattle profile picture

GmanIV: Why sell low? All right, here's my thinking:

Moving Av. ------- Price$ ------- Slope
Today ------------- 47.14 ------- DOWN
10 Day-------$47.26 DOWN
21 Day------- 49.23 DOWN
50 Day------- 49.65 DOWN
200 Day ----- 49.75 DOWN

It's on a down slope - It's been for more than 200 days - it could suddenly start going up, but my instinct tells me it will lose more steam, which will give me an opportunity to re-enter and purchase more share at a better price, while capturing the small gain I made since my purchase.
In the meanwhile, by purchasing the preferred CBLpD paying 7.75%, I am losing nothing in terms of dividends and I can use these divs to repurchase SO at a lower price. And I am betting on SO going lower.
Now, if SO goes up in price, I may not be able to repurchase at any lower price than I sold it, so yes, it is a bet or a gamble, if you wish.
I already own UTG (Reaves Utility Income Trust) and PPL to take care of my uts allocation. I reduced PPL to capture a very nice profit, moved the money to other preferreds. PPL kept on going up after I reduced, but, again, my preferreds are paying me a higher div, so no harm done.
I am not selling UTG, though. It gives me 5.54% - it's gone up quite a bit since my purchase.
Next Era Energy would be an excellent investment if the likelihood of a market correction wasn't as large as it now is at $143. per share, up well over 25% over the past 12 months. Large-Cap, Public, Regulated Utilities, that have risen as much as 'NEE' has don't have a great history of future performance. That's even true of MMM, which after it rose, as it has over the last year, which was 2014; from $120 to about $160 and then back down to around $130, twice before its last run up to over $215.!

We would invest heavily in Next Era at prices, at least 5% lower than they are now because, for 1 thing, who would scare investors away from 'NEE' due to 'Amazon fever'.
Dividend Sensei profile picture
Fair enough.

NEE is probably my favorite regulated utility, courtesy of its industry leading dividend growth rate.

Of course that means a high premium that never seems to decline.

Market correction is now 8 months overdue but that might might stretch to 2 years, given how infrequently corrections happen these days.
Dividend Sensei profile picture
I'm a big fan of AWK and WTR, as well as D, NEE, and WEC.

Back when I owned 200 stocks I owned them all.

Had to consolidate down to 96 stocks (too much work to track 200) but their fundementals are excellent.

As for energy, that's the most hated industry right now, and where I am focusing all my new capital for the foreseeable future.

XOM is the gold standard of producers, though I prefer to focus on the midstream space.

My portfolio includes 20 Midstream MLPs that I consider to have generous, safe, and growing payouts, no matter what crude or gas prices do.

I'm hoping that oil remains cheap for the next year, because that's how long I estimate it will take me to build out full positions in all of them.

By that point I'm hoping that higher interest rates will have beaten down REITs so I can then focus on them.

As for utilities? Well it depends. In the short-term rates may bring those down, so great buying opportunities.

However, because utiliites are a VERY low beta industry, any pullback is likely to be small, maybe 5% to 10%.
dealing with 20 k-1's must be a pain the you know what! 96 stocks is still a ton! I wont let myself ever get above 20 stocks, just give me the best of the best and divisified and keep it simple!
Dividend Sensei profile picture
Not so bad actually.

Turbo Tax streamlines it to just 3-5 minutes per K-1.

I get everthing else done, and then wait for K1s to arrive and do them as they come in.

By April 1 or so, they stop and I submit my taxes, taking advantage of Turbo Tax's 50% off discount (wait for it, they always do it).

As for 96 stocks, sure it's a lot. Then again, I'm a very hands off investor.

I carefully selected each one to provide a generous, safe, and growing payout, and check in once a quarter to make sure that's still the case.

The rest of the time I don't have to track anything, other than if something drops and I buy it on the dip.

In the future I might consolidate further or diversify back to 200.

My current plan is to weight by yield across all of them, priority to MLPs as long as oil is $45 or under.

Once I've fully finished each position (I estimate $1 million or so in invested capital, so a long time) I'll go back through and re-weight ($1100 per % of yield rounded up instead of $1000) and add back in a quality high-yielder, (such as WPC or IRM).

Then each time I make it through the portfolio, I might add back in one of the company's I had to remove.

By the time I get back to 200, (decades from now) I'll have probably invested $5 to $10 million and the portfolio will be providing me daily dividends of impressive size, about $50,000 a day or so.

Nice liqudity to retire on, I'd say, while investing at least 50% of the post tax income stream, with 25% going to my favorite charity, and 25% funding an exponentially growing standard of living.
I agree on MLP's with oil being so, golden buying opportunity!
jwadtw profile picture
I don't think I'll let go of SO. It's been dripping away for many years to my satisfaction, and I add from time to time. I regard Duke the same way, though I don't own it.

SO has a protected moat, serves a friendly market and regulatory regime, pays a solid and proven-to-grow dividend and, right now, is trading at the bottom of its 200 day MA. I'm thinking it's a good time to buy some more.

At age 66, I'm more interested in dividends and preservation of capital. A 2% return on my portfolio is adequate to fund my moderate lifestyle, hence I tend toward the conservative, while having a small corner (about 10%) of net worth set aside for playing options and taking a few chances. My SO is outside of that as a core holding.
Dividend Sensei profile picture
Good for you. Like I said in the article, I like SO, and their long-term plan.

Not as confident in management's guidance due to its poor execution track record, but you certainly won't lose your shirt owning it.
A variety of investment grade Regulated Utilities, including mostly regulated Southern Company as well as Next Era Energy, would seem 'indispensable', as a foundation. Water Utilities, like Aqua America, 'WTR', American States Water, 'AWR', American Water Works, 'AWK', are worthy and have surprisingly high 'CAGR' for both 'Earnings' and 'Dividend' growth, with 'AWR' being a special case with over 60+ years of consecutive dividend increases, and a 5 year average dividend increase above 8%. They're all a bit pricey, but so is 'NEE' and 'NEP'.

My dad has utilities, second only to Energy, which starts Exxon in 3 separate accounts, and the largest member of a 27 component trust he set up in the last century. Overall, he keeps 2/9 in Exxon and has been adding shares in 2017, for the 1st time since he held Mobil and Exxon separately. His 'cost basis' on those shares, with dividends subtracted are around zero since he has been adding since 1960.
I love water stocks but they are ALL super over valued at this present time
SCANA is a very strong up and coming Utility!
Besdayz profile picture
Looking for yield > 5.0%
4.90%...very close
SpiceyDiceyLifey profile picture
I didn't see any comparisons to DUK?
Dividend Sensei profile picture
In the future I'll do some compare/contrasts with DUK.

While it's an OK utility I have plenty of better alternatives such as WEC, D, NEE, not to mention yieldCos like NEP and BEP.
Duke has not shot up to crazy levels the past 5 years like most Utilities have, I think its prob the best value play right now along with SO
Dividend Sensei profile picture
Thanks for the tip.

I'll have to take a look at it.
George Fisher profile picture
I agree with those that comment this article is not an apples to apples comparison. The articles compares a yieldco with a $2 bil market cap with a diversified regulated utility with a market cap of $50 billion. NEP pays a still hefty fee in the form of IDRs with 25% of all future cash flow available for distribution above $1.41 per share goes to the management team. There is a great reason other MLPs bought their general partners. I would prefer the compairon was between NEP and other yieldcos or other MLPs.

I am looking to add more SO when the write-off is announced and the weak hands are throwing in the towel. Look for a down day on high volume. If the stock was trading at $50 before they were thrown under the bus by the Mississippi PUC, and the write off is $3.5 bil (or $3.50 per share, before tax benefits of about $1), a buy price in the $46 (vs $47.29) currently or less range would seem appropriate.
RoseNose profile picture
I can always count on you George to know the utility happenings.
I thought it was dropping nicely to a price even ole bargain hunter Rose would like.
That explains it.
Much appreciated and glad I follow you.
Rose :))
SO 'has been' a great company in the past, but Im very weary of its uncertain future.
Guess who is going to pay for Vogtle? - the shareholders, one way or the other. no thanks.
not interested in any utilities at current prices.
Don't think I'll "Forget Southern Company" in favor of NEP any time soon. (If I were to invest in NextEra, it would be NEE instead of yieldco NEP.)

Long SO and adding.

Retired income/dividend-growth investor
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