Southern Co. (SO) has a well-run base of regulated utility assets and a presence in states with favorable population trends, like Georgia, notes Angus Kelleher-Ferguson, a utility sector analyst with Argus Research, a leading independent Wall Street research firm.
Management recently boosted its long-term earnings growth rate estimate, and the balance sheet is solid enough to support strong dividend growth. The current yield of about 4.0% is well above the peer average of 3.1%.
Southern has outlined plans to improve its energy generation mix through coal plant retirements and an increased focus on renewables. Back in 2015, the company’s energy mix was 47% gas, 32% coal, 16% nuclear, and 5% renewables/other. This compares to a year-to-date 2021 mix of 47% gas, 22% coal, 16% nuclear, and 15% renewables/other.
We have a positive view of the shift toward renewables, as utilities with renewable-generating assets tend to be viewed more favorably by regulators.
There are risks to the stock: management is working to move past delays and cost overruns at the company’s Vogtle nuclear plants, and COVID safety measures have made these efforts more expensive.
During the 2Q21 conference call, management announced further construction delays and increased costs, though we believe that it wanted to be conservative in discussing construction. We believe that the outlook for the plants has become clearer and that their completion could provide a positive catalyst for the shares.
SO shares have underperformed the S&P 500 over the past three months, rising 3%, compared to a 7% gain for the index. The shares have also underperformed over the past year, rising 23% compared to a 32% gain for the index. The beta on SO shares is 0.37
In June 2021, the company raised its quarterly dividend by 3.1% to $0.66 or $2.64 annually. The current yield is about 4.0%. SO has raised its dividend at an average annual rate of 3.4% over the past five years. Our 2021 dividend estimate is $2.62 and our 2022 estimate is $2.70.
We think that SO shares are attractively valued. Our weighted PEG calculation points to a fair value of $68 per share, reflecting slower growth in 2021.
As Southern moves past this period of slow growth, we expect the PEG valuation to increase. SO also carries an attractive dividend with a yield of about 4.0%, well above the peer average of 3.1%. We are maintaining our BUY rating with a revised target price of $75.
