Is The Southern Company Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Southern Company (SO 1.10%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell Southern's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at Southern's key statistics:

SO Total Return Price data by YCharts.

Source: YCharts. * Period begins at end of Q1 2011.

SO Return on Equity (TTM) data by YCharts.

Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
Southern's fundamental position has deteriorated since we first looked at it last year, as the utility company only musters two out of nine possible passing grades in its second assessment, down from five in 2013. The company's EPS and profit margins have declined, and revenue has essentially flatlined after accounting for inflation during our three-year period. Southern's commitment to its dividend payments also appears increasingly unsustainable, as it's been some time since it paid out less than its full free cash flow as dividends, according to our analysis. Can this well-established utility provider improve these sliding metrics and earn a better score next time? Let's dig a little deeper to find out.

Southern had a great start to 2014, as one of the few areas of growth in America's economy during the first quarter was found in utilities, which thrived on providing extra heat and electricity to snowbound residential and commercial customers across the U.S. In addition, the company recently increased its quarterly dividend payouts to $0.525, which works out to a solid 4.7% dividend yield at current share prices.

In recent years, Southern and other utilities have been transitioning away from coal-fired plants to cleaner-burning fuels, particularly natural gas -- but also nuclear in some cases -- in an effort to slash carbon emissions in advance of tighter government regulation. Coal's contribution to Southern's power generation capacity has declined from 70% a decade ago to just 45% this year, as natural gas now accounts for approximately 35% of the total mix, which also includes nuclear and hydroelectric power. Rock-bottom natural gas prices, and tightening greenhouse gas emission standards, has made it far more sensible to build a fleet of natural-gas turbine plants in recent years -- my fellow writer Sara Murphy notes that the EPA's current proposal would force electric utilities to cut carbon dioxide emissions by 30% by 2030.

As a part of its strategic shift toward alternative fuels, Southern has been building two new nuclear power plants and a state-of-the-art coal facility. Foolish writer Reuben Brewer notes that the company's Kemper coal facility uses coal gasification and carbon capture technologies, which makes it one of the world's "cleanest" coal-fired power plants. Southern is also taking advantage of government credits, as it received a $270 million grant for its Kemper facility (the facility costs more than $5 billion), and it can potentially obtain the same amount in tax credits if it reaches certain carbon-capture milestones. However, the Kemper coal facility has already faced many challenges, including unnecessary delays and cost overruns last year. Southern also recently announced plans to construct and operate three 30 megawatt solar farms on army bases in Georgia by the end of 2017.

Putting the pieces together
Today, Southern Company has few of the qualities that make up a great stock; but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.