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Is Southern Company Stock a Buy?

By Reuben Gregg Brewer – Feb 1, 2020 at 7:53AM

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Up by nearly 50% over the past year, is this giant southeast utility still worth buying?

Southern Company (SO -1.25%) has a market-beating yield of 3.5% and, as one of the largest utilities in the United States, is viewed as a safe haven investment. However, the stock is up 47% over the past 12 months. Is it still worth adding to your portfolio after such a good run?

From last to first

In 2017 and 2018 Southern lagged well behind the utility peer group, as measured by Vanguard Utility ETF. The numbers were huge: Over that two-year span Southern's stock fell 10% while the Vanguard Utility ETF advanced 10%, a 20 percentage point difference. That may not sound like much, but utilities are supposed to be slow and steady stocks of the type that so-called "widows and orphans" might own because of the safety and the income they produce. Note that, at the end of 2018, Southern's yield was nearly 5.5%. 

A worker standing in front of electrical power equipment

Image source: Getty Images.

Since the start of 2019, however, Southern's stock has been on fire ... for a utility. The stock is up nearly 60% since that point, providing more than twice the return of the utility average. In fact, its return was roughly twice that of the S&P 500 Index, as well. That's worthy of note, being that the average utility basically tracked along with, though slightly behind, the S&P 500. It isn't often that a utility stock beats that S&P 500 by a two-to-one margin.

Getting back on track

The big price advance was largely driven by the company's ongoing efforts to build a pair of nuclear power plants at its Vogtle facility. In 2017 the future of this project was in question following the bankruptcy of Westinghouse, Southern's contractor on the project. Add in the fact that the project was already behind schedule and over budget, and investors were increasingly concerned it wouldn't get done. Canceling Vogtle would have been a huge blow, financially and image-wise. Peer SCANA, for example, ended up canceling its nuclear build, a move that left it in a precarious financial position and led to its eventual acquisition by Dominion Energy.

Southern chose to step in and take over the Vogtle project. It also had to, basically, agree with its partners that it would shoulder any further cost increases to keep the nuclear build alive. These were bold moves and ones that, based on the project's track record, involved a lot of risk. Investors understandably took a show-me attitude, letting Southern's stock languish while it proved it could handle the massive task it had taken on. So far, however, Southern has done a great job of getting Vogtle back on track, hitting a number of important milestones in 2019. The next three years will see the completion of the two nuclear reactors, assuming all continues to go well. Add in solid earnings in 2019, and the stock had a huge run.

So Southern has gone from pariah to darling in roughly 12 months. And that changes the equation a great deal when it comes to investors. For example, at this point, the stock is trading near all-time highs and the dividend yield is near all-time lows. For value-conscious investors, adding Southern would be a tough call. Although its price-to-earnings ratio is toward the low end of its closest peers (size-wise), suggesting that it's relatively inexpensive, its yield is far from compelling, historically speaking, and modest relative to those same peers. While historically low yields are fairly common in the utility space right now, it doesn't mean investors should step in at Southern.

SO Dividend Yield Chart

SO Dividend Yield data by YCharts

The big problem is the same one that left Southern a laggard through 2017 and 2018: Vogtle. This project remains years away from completion. And there are a lot of major milestones that it needs to achieve if it is to get done on time and on budget. Building a nuclear power plant is a complicated affair, and while the success Southern has had getting Vogtle back on track is laudable, it still has a lot of work to do before it is done. 

Not a great buy

At the end of the day, investors who own Southern should be pleased that Mr. Market has bid the shares higher. There's no particular reason to sell the stock, being that things are going well in its core businesses and with the once-troubled Vogtle project. However, after such a sharp run up, investors looking to initiate a position should probably hold off. Southern's stock may look relatively cheap compared to some of its peers, but that doesn't mean it's a bargain. If you are looking for dividend stocks, the midstream sector and some select real estate investment trusts would provide a better hunting ground.

Reuben Gregg Brewer owns shares of Dominion Energy, Inc and Southern Company. The Motley Fool recommends Dominion Energy, Inc. The Motley Fool has a disclosure policy.

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