Tags: Southern | market | rockiness | SO

Southern Gains On Market Rockiness, Low Rates

By    |   Tuesday, 10 April 2012 11:17 AM

Southern (SO) has benefited from market rockiness and low interest rates over the past several years, appreciating 16.5 percent on top of a strong dividend, a great bet while interest rates remained low. It remains to be seen, though, how many investors will stick with a regulated utility once a new bull market emerges.

Southern Company owns companies which supply electricity in the states of Alabama, Georgia, Florida, and Mississippi. It also owns Southern Power, which builds, owns and runs generation assets, including renewable energy projects, and sells electricity at market-based rates in the wholesale market.

Besides regulated power, Southern owns or has an interest in wireless assets, nuclear power and other subsidiaries related to power provision.

In 2011, earnings rose by $228 million on revenue of $2.2 billion, largely due to increases in authorized rates in Georgia and some cost-cutting. But the reason many investors choose to own Southern is income. It has paid a dividend since 1948, three years after the company’s founding.

Management estimates that the 2011 payout was equal to 73 percent of net income, above target. At recent prices, the dividend rate was 4.2 percent.

Southern is a $38.75 billion market cap firm in a sector where the average market cap is much smaller, at $6.82 billion. Its trailing 12-month P/E ratio is 17.54 vs. 11.29 for the electric utilities sector.

Southern has a five-year price-to-earnings-growth (PEG) ratio of 3 compared to 11 for its sector. Earnings per share growth for the coming year is projected to be 5.62 percent, less than half of the sector’s average of 13.06 percent.

Half full

Analysts are broadly negative on Southern Co., offering multiple sell calls, although some of its ratings, both positive and negative, are months out of date.

Standard & Poor’s equity analysts see the glass as half-full: Southern will do well and continue to throw off cash to its investors in the form of dividends. But the interest that has driven its stock higher in recent years has less to do with Southern than weariness of the market in general.

That trend is likely to change, warns S&P.

“The stock advanced 21.1 percent in 2011, largely driven, in our view, by an investor shift away from the volatility and often sharp declines in the broader market to the higher yielding electric utility sector, as well as by the gradual improvement in SO's service territory economy, particularly in the industrial sector,” S&P analysts wrote recently.

“However, we expect to see a shift away from the utility sector over the near term.”

Southern next reports on April 25.

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