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Southern's Shares Surge 29% Year to Date: Time to Buy or Hold?
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Southern Company (SO - Free Report) has demonstrated resilience, with its share price increasing 29.1% year to date, reaching the 52-week high of $90.59 yesterday. This gain significantly outperforms the broader utility sector, which has increased 19.6% in the same time. Additionally, SO has outperformed its key competitors in the Electric Power utility sub-industry, including DTE Energy Company (DTE - Free Report) , E.ON SE (EONGY - Free Report) and Enel SpA (ENLAY - Free Report) .
Given the recent Federal Reserve interest rate cut of 0.50%, investors are increasingly looking for stable and dividend-paying stocks. The utility sector and Southern Company, in particular, may be an attractive option for investors seeking to weather the current market volatility.
YTD Price Comparison
Image Source: Zacks Investment Research
Founded in 1945 and headquartered in Atlanta, GA, SO is a powerhouse in the U.S. utility sector. With a robust portfolio that includes electricity generation, transmission and distribution, SO has established itself as a leader in serving approximately nine million customers across the company’s seven electric and natural gas distribution units.
The company has a capacity of 46,000 megawatts, a network of 200,000 miles of electric transmission lines and more than 80,000 miles of natural gas pipelines. Since merging with AGL Resources in 2016, SO has expanded its services to include wholesale electricity generation, natural gas services, retail energy solutions and gas storage operations. In simple terms, SO makes money by producing electricity and selling this to its customers. The company has different types of power plants like coal, gas, nuclear and hydroelectric to generate electricity. It sends this electricity to homes, businesses and other companies.
With shares soaring year to date, investors are now left wondering: is there still time to dive in or should they hold off? Let’s explore the factors at play and this growth’s importance in investment strategy.
Reasons to Buy Southern Company
Stable Cash Flow From Regulated Operations: SO relies heavily on its regulated utility operations for revenues, which gives it a stable cash flow. This financial consistency is good for conservative investors looking for long-term, reliable returns. SO’s business model uses state-regulated rates, which helps shield it from the market’s ups and downs. Additionally, the company has a well-rounded energy mix that includes natural gas, nuclear, coal and renewables.
Image Source: Southern Company
This diversity reduces the risks of depending on any one energy source and positions it to handle changes in energy prices. The diverse portfolio also aligns with the company's strategy to achieve cleaner energy by 2050.
Successful Nuclear Operations: The start of commercial operations for Units 3 and 4 at the Vogtle nuclear project is a major win for SO, making it the largest clean energy generator in the United States. Despite facing delays and budget issues, this achievement shows that the company can manage big projects and is committed to providing carbon-free energy. With the rising demand for reliable electricity driven by AI and data centers, SO’s focus on nuclear energy puts it in a strong position to meet this growing need and stay competitive in the changing energy market.
Decades of Dividend Stability: SO has more than 70-year history of paying dividends, making it one of the most reliable dividend-paying stocks in the utility sector. Investors seeking stable, recurring income will appreciate SO’s commitment to maintaining and gradually growing its dividend, even during market volatility. Its current dividend yield of around 3% is particularly attractive for those looking for steady returns from the utility sector.
Government Support for Energy Infrastructure: SO stands to benefit from federal infrastructure investments, especially through programs aimed at modernizing the energy grid and expanding renewable energy sources. Government support and stimulus measures, such as the Inflation Reduction Act and related clean energy initiatives, could provide long-term tailwinds for SO's growth in areas like solar and wind energy.
Defensive Stock in Economic Uncertainty: SO operates in a defensive sector, utilities, which are known for resilience during economic downturns. People continue to use electricity and natural gas regardless of the broader economic climate, making SO’s earnings less volatile compared with other sectors during recessions or inflationary periods.
Reasons to Wait Before Buying SO’s Shares
Volatile Natural Gas Prices: SO’s natural gas revenues declined 2.5% in second-quarter 2024 compared with the prior-year quarter's level driven by volatility in natural gas prices. Fluctuations in energy markets may affect SO’s profitability, especially if gas prices continue to remain unpredictable.
High Capital Spending Projects: SO is involved in long-term, capital-intensive projects such as the Plant Vogtle nuclear expansion. Although this project promises significant returns, it has faced numerous cost overruns and delays. The company continues to face risks related to the final completion costs and timelines, which could negatively impact its financial performance.
Pressure on Profit Margins due to Regulatory Rate Constraints: SO still faces regulatory constraints on its ability to raise consumer rates, limiting the company’s ability to pass through higher operational costs. Regulators may resist approving rate hikes in a low-interest-rate environment, especially if inflation remains low, putting pressure on SO’s profit margins.
Reduced Revenues From Wholesale Markets: Lower interest rates signal slower economic growth or recessionary fears, which could lead to reduced demand for electricity from industrial and commercial customers. This could affect SO’s wholesale energy sales, leading to lower revenues from its non-regulated businesses that depend on large-scale electricity consumption by businesses.
Limited Growth Potential in a Mature Sector: Utility companies like SO tend to offer steady, predictable returns, but it often lacks the explosive growth potential seen in other sectors. Investors seeking high-growth opportunities might find SO’s focus on regulated utility services and infrastructure too conservative, especially during booming periods in the tech or renewable sectors.
High P/E Ratio Signals Potential Overvaluation: Another key concern about SO is its high P/E ratio of 21.66, which is above the sector’s average of 20.98. This suggests that investors might be overestimating the company's growth potential. Given the risks associated with volatile natural gas prices and the substantial costs tied to projects like the Plant Vogtle nuclear expansion, the current valuation may not be justified. If these challenges lead to earnings pressure, the stock price could take a hit. As a result, investors might want to think before jumping in, as there are signs that the stock could be overvalued right now.
Final Thoughts for SO Stock
SO's strengths, stable cash flow from regulated operations, a solid track record in nuclear expansions and 70 years of reliable dividends, make it appealing to investors. With government backing for energy infrastructure, it is a defensive choice in uncertain times.
However, investors should be cautious of challenges like volatile natural gas prices, overvaluation, high capital costs and a maturing sector, alongside rising competition from renewables and regulatory profit constraints. Of the 21 brokers covering SO stock, eight have rated it as a Strong Buy, one as a Buy, 11 as a Hold and one as a Sell. Instead of rushing to add SO stock to their portfolios, investors should wait for a more opportune entry point. The company currently carries a Zacks Rank #3 (Hold).
Image: Shutterstock
Southern's Shares Surge 29% Year to Date: Time to Buy or Hold?
Southern Company (SO - Free Report) has demonstrated resilience, with its share price increasing 29.1% year to date, reaching the 52-week high of $90.59 yesterday. This gain significantly outperforms the broader utility sector, which has increased 19.6% in the same time. Additionally, SO has outperformed its key competitors in the Electric Power utility sub-industry, including DTE Energy Company (DTE - Free Report) , E.ON SE (EONGY - Free Report) and Enel SpA (ENLAY - Free Report) .
Given the recent Federal Reserve interest rate cut of 0.50%, investors are increasingly looking for stable and dividend-paying stocks. The utility sector and Southern Company, in particular, may be an attractive option for investors seeking to weather the current market volatility.
YTD Price Comparison
Image Source: Zacks Investment Research
Founded in 1945 and headquartered in Atlanta, GA, SO is a powerhouse in the U.S. utility sector. With a robust portfolio that includes electricity generation, transmission and distribution, SO has established itself as a leader in serving approximately nine million customers across the company’s seven electric and natural gas distribution units.
The company has a capacity of 46,000 megawatts, a network of 200,000 miles of electric transmission lines and more than 80,000 miles of natural gas pipelines. Since merging with AGL Resources in 2016, SO has expanded its services to include wholesale electricity generation, natural gas services, retail energy solutions and gas storage operations. In simple terms, SO makes money by producing electricity and selling this to its customers. The company has different types of power plants like coal, gas, nuclear and hydroelectric to generate electricity. It sends this electricity to homes, businesses and other companies.
With shares soaring year to date, investors are now left wondering: is there still time to dive in or should they hold off? Let’s explore the factors at play and this growth’s importance in investment strategy.
Reasons to Buy Southern Company
Stable Cash Flow From Regulated Operations: SO relies heavily on its regulated utility operations for revenues, which gives it a stable cash flow. This financial consistency is good for conservative investors looking for long-term, reliable returns. SO’s business model uses state-regulated rates, which helps shield it from the market’s ups and downs. Additionally, the company has a well-rounded energy mix that includes natural gas, nuclear, coal and renewables.
Image Source: Southern Company
This diversity reduces the risks of depending on any one energy source and positions it to handle changes in energy prices. The diverse portfolio also aligns with the company's strategy to achieve cleaner energy by 2050.
Successful Nuclear Operations: The start of commercial operations for Units 3 and 4 at the Vogtle nuclear project is a major win for SO, making it the largest clean energy generator in the United States. Despite facing delays and budget issues, this achievement shows that the company can manage big projects and is committed to providing carbon-free energy. With the rising demand for reliable electricity driven by AI and data centers, SO’s focus on nuclear energy puts it in a strong position to meet this growing need and stay competitive in the changing energy market.
Decades of Dividend Stability: SO has more than 70-year history of paying dividends, making it one of the most reliable dividend-paying stocks in the utility sector. Investors seeking stable, recurring income will appreciate SO’s commitment to maintaining and gradually growing its dividend, even during market volatility. Its current dividend yield of around 3% is particularly attractive for those looking for steady returns from the utility sector.
Government Support for Energy Infrastructure: SO stands to benefit from federal infrastructure investments, especially through programs aimed at modernizing the energy grid and expanding renewable energy sources. Government support and stimulus measures, such as the Inflation Reduction Act and related clean energy initiatives, could provide long-term tailwinds for SO's growth in areas like solar and wind energy.
Defensive Stock in Economic Uncertainty: SO operates in a defensive sector, utilities, which are known for resilience during economic downturns. People continue to use electricity and natural gas regardless of the broader economic climate, making SO’s earnings less volatile compared with other sectors during recessions or inflationary periods.
Reasons to Wait Before Buying SO’s Shares
Volatile Natural Gas Prices: SO’s natural gas revenues declined 2.5% in second-quarter 2024 compared with the prior-year quarter's level driven by volatility in natural gas prices. Fluctuations in energy markets may affect SO’s profitability, especially if gas prices continue to remain unpredictable.
High Capital Spending Projects: SO is involved in long-term, capital-intensive projects such as the Plant Vogtle nuclear expansion. Although this project promises significant returns, it has faced numerous cost overruns and delays. The company continues to face risks related to the final completion costs and timelines, which could negatively impact its financial performance.
Pressure on Profit Margins due to Regulatory Rate Constraints: SO still faces regulatory constraints on its ability to raise consumer rates, limiting the company’s ability to pass through higher operational costs. Regulators may resist approving rate hikes in a low-interest-rate environment, especially if inflation remains low, putting pressure on SO’s profit margins.
Reduced Revenues From Wholesale Markets: Lower interest rates signal slower economic growth or recessionary fears, which could lead to reduced demand for electricity from industrial and commercial customers. This could affect SO’s wholesale energy sales, leading to lower revenues from its non-regulated businesses that depend on large-scale electricity consumption by businesses.
Limited Growth Potential in a Mature Sector: Utility companies like SO tend to offer steady, predictable returns, but it often lacks the explosive growth potential seen in other sectors. Investors seeking high-growth opportunities might find SO’s focus on regulated utility services and infrastructure too conservative, especially during booming periods in the tech or renewable sectors.
High P/E Ratio Signals Potential Overvaluation: Another key concern about SO is its high P/E ratio of 21.66, which is above the sector’s average of 20.98. This suggests that investors might be overestimating the company's growth potential. Given the risks associated with volatile natural gas prices and the substantial costs tied to projects like the Plant Vogtle nuclear expansion, the current valuation may not be justified. If these challenges lead to earnings pressure, the stock price could take a hit. As a result, investors might want to think before jumping in, as there are signs that the stock could be overvalued right now.
Final Thoughts for SO Stock
SO's strengths, stable cash flow from regulated operations, a solid track record in nuclear expansions and 70 years of reliable dividends, make it appealing to investors. With government backing for energy infrastructure, it is a defensive choice in uncertain times.
However, investors should be cautious of challenges like volatile natural gas prices, overvaluation, high capital costs and a maturing sector, alongside rising competition from renewables and regulatory profit constraints. Of the 21 brokers covering SO stock, eight have rated it as a Strong Buy, one as a Buy, 11 as a Hold and one as a Sell. Instead of rushing to add SO stock to their portfolios, investors should wait for a more opportune entry point. The company currently carries a Zacks Rank #3 (Hold).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.