This Utility Giant is Moving Forward

Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Southern Company (NYSE: SO) is one of the biggest publicly traded utilities in the country. There are four public utility companies operating under the parent holding company. The operating companies are Alabama Power Company, Georgia Power Company, Gulf Power Company, and Mississippi Power Company.

Recent Moves

The Nuclear Regulatory Commission has not granted a permit for the construction of a nuclear powered electrical generating plan for 38 years; but on Feb. 9, 2012 the agency issued approval permits to the Southern Company. The licensing approval is for two reactors the company will add to its currently operational Vogtke nuclear plant in Georgia.  The company expects the first of the new reactors to be operational in 2012, with the total cost of the complete project budgeted at $14 billion.

The company’s recent third quarter earnings release showed an increase in earnings per share to $1.11 from $1.07 in Q3 2011. However, revenue dropped 7%, from $543 billion in Q3 2011 to $505 billion for the current quarter. Company management stated the first half of the year was strong but multiple concerns including the election, the fiscal cliff, and a slowing global economy, contributed to the drop.

Future Prospects

Southern Company’s share price dropped 4.9% for the half year and 6.27% for the month.  Although demand for power drops in challenging economic conditions, the fact is consumers and corporations cannot function without electricity.  Demand will return, as it always does, and Southern’s share price will rise again, as it has done in the past.

The company’s future prospects are in renewable energy. In 2012, Southern formed a partnership with Turner Renewable Energy to seek opportunities in renewable energy sources here in the US.  Initially the joint venture acquired three solar facilities; one in New Mexico, one in Nevada, and the most recent in North Carolina. 

Southern is also involved in electricity generation from natural gas.  In a Dec. 4 press release the company announced the commencement of a natural gas generating facility in North Carolina. This is Southern’s third natural gas generating location in that state.

Southern Company vs. the Rest

One of the many advantages of owning utility stocks is minimal competition due to the regulatory environment.  Southern is the primary provider of electricity throughout the American Southeast.  The following table looks at some key performance metrics for Southern and two other major US power providers: Duke Energy (NYSE: DUK) and Excelon Corporation (NYSE: EXC).

<table> <tbody> <tr> <td> <p><strong>Indicator</strong></p> </td> <td> <p><strong>Southern Company </strong></p> </td> <td> <p><strong>Duke Energy</strong></p> </td> <td> <p><strong>Excelon </strong></p> </td> </tr> <tr> <td> <p><strong>Market Cap</strong></p> </td> <td> <p>$37.5 billion</p> </td> <td> <p>$44.8 billion</p> </td> <td> <p>$24.8 billion</p> </td> </tr> <tr> <td> <p><strong>TTM P/E</strong></p> </td> <td> <p>16.99</p> </td> <td> <p>20.02</p> </td> <td> <p>16.1</p> </td> </tr> <tr> <td> <p><strong>FY 2013 Forward P/E</strong></p> </td> <td> <p>15.38</p> </td> <td> <p>14.45</p> </td> <td> <p>11.38</p> </td> </tr> <tr> <td> <p><strong>P/B Ratio</strong></p> </td> <td> <p>2.01</p> </td> <td> <p>1.09</p> </td> <td> <p>1.13</p> </td> </tr> <tr> <td> <p><strong>Quarterly Earnings Growth </strong></p> </td> <td> <p>6.6%</p> </td> <td> <p>-25.85</p> </td> <td> <p>-50.7%</p> </td> </tr> <tr> <td> <p><strong>Dividend Yield</strong></p> </td> <td> <p>4.57%</p> </td> <td> <p>4.81%</p> </td> <td> <p>7.2%</p> </td> </tr> <tr> <td> <p><strong>Debt/Equity</strong></p> </td> <td> <p>1.10</p> </td> <td> <p>0.96</p> </td> <td> <p>0.89</p> </td> </tr> <tr> <td> <p><strong>Return on Equity</strong></p> </td> <td> <p>11.5%</p> </td> <td> <p>5.07%</p> </td> <td> <p>7.62%</p> </td> </tr> </tbody> </table>

If high dividend is what you are after, the numbers seem to indicate Excelon would be your best choice.  However, this is a good example of why interpreting yield without share price performance can be a false indicator.  Excelon’s yield is relatively high since its the share price has dropped 30.25% year-over-year, while Southern is up 1.54% and Duke is up 1.0%.

While both Duke and Southern have attractive forward price to earnings ratios, past performance favors Southern. Return on equity is higher and the company has shown positive quarterly earnings growth on a year over year basis, while Duke’s negative 25.85% could be a cause for concern.

Industry Risks

Expansion of solar power generating plants might surprise some who believe the conventional wisdom that solar power is not cost effective. However, a recent report from Bloomberg points out a 75% drop in the price of Photo Voltaic modules since 2009.  The report claims solar power is already competitive with traditional power generating sources in some countries.

Foolish Summary

Southern Company is a reliable dividend payer and a solid performer with an eye on future growth through alternative energy sources. The company has a well-diversified consumer portfolio. While regulatory risks are inherent, Southern is well-positioned for future challenges. The company has been a great income stock, and I expect it to stay as such for a long period in future.

ecofinstat has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Exelon and Southern Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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