We have maintained our Neutral recommendation on electric utility firm Southern Company (SO) with a price target of $41.
Headquartered in Atlanta, Georgia, Southern Company is the second largest generator of electricity in the nation behind Exelon Corp. (EXC), serving both regulated and competitive markets across the Southeastern U.S. It is a holding company for four regulated Southern electric utilities that serve about 4.4 million customers – Georgia Power, Alabama Power, Gulf Power and Mississippi Power.
Southern Company participates in all phases of the electric utility business with more than 42,000 megawatts (MW) of electric generating capacity, and an extensive grid of transmission and distribution lines. The company also engages in the construction, acquisition, and management of generation assets, provision of digital wireless communications services, and the provision of fiber optic solutions to telecommunication providers.
We consider the Southeast to be one of the better regions to operate an electric utility, due to the higher-than-average natural population growth, the strong and diverse regional economy, constructive regulation and comparatively tight power markets. These characteristics provide a solid basis for Southern’s regulated business, which is expected to make up roughly 90% of its consolidated earnings over the next few years.
With good rate base growth and constructive regulation, we believe Southern Company will be able to generate steady earnings and dividend growth in the coming years through its long-term power contracts.
Southern pays an annual dividend of $1.89 per share, yielding an attractive 4.7%. The utility increased its dividend payout by 3.9% in April 2011, marking the 10th consecutive year of dividend increase. Southern has a long and consistent dividend paying record. The company has paid dividends in each of the last 254 quarters for more than 60 years. As such, we believe Southern’s dividend to be safe and reliable.
However, with more than 30% of the company’s total retail sales coming from industrial customers, a sluggish economy severely affects the fortunes of Southern, as compared to other utilities that are less dependent on the industrial component. Though industrial sales rebounded in the January – March period (increasing 6.7% year-over-year), we would like to see a few more positive quarters before we become sure of the sustainability of the economic recovery.
The challenging economic environment and a return to more normal spending levels may also hamper Southern’s results during the next few quarters, which are expected to further limit its ability to generate positive earnings surprises.
As of now, we don't see any obvious catalyst in its business to significantly push the stock price higher. Consequently, we see Southern Company shares performing in line with the broader market. Our long-term Neutral recommendation is supported by a Zacks #3 Rank (short-term Hold rating).
EXELON CORP (EXC): Free Stock Analysis Report
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