On the surface, it would seem like NextEra Energy (NEE 1.58%) and The Southern Company (SO -0.50%) are very similar, since they are both large U.S. utilities. Once you get past that top level, however, there are a lot of important differences. Is one better than the other, or are they just meant for different types of investors? Here's a quick comparison.
1. Dividends
When investors look at the utility sector, often the goal is to find a reliable dividend stock. Both NextEra and Southern would fall into that category. However, they reside in different camps. The average utility, using the Vanguard Utility Index ETF (VPU 0.56%) as a proxy, has a 2.8% dividend yield. Southern's yield is 3.9%, and NextEra's yield is 2%. If your goal is maximizing your income stream right now, Southern wins hands down.
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That said, Southern has increased its dividend annually for 21 consecutive years with an annualized rate of 3% over the past decade. It gets kudos for the streak's length, but dividend growth is pretty modest. NextEra has increased its dividend annually for 28 years, and the annualized pace of increase over the past 10 years was an enticing 10% or so. So, if you are a dividend growth investor, NextEra will likely be your choice.
2. Valuation
NextEra's price-to-earnings (P/E) ratio currently sits at around 43 times. That's rather lofty for a utility, even one that provided material dividend growth over time. Southern's P/E ratio is around 22 times, which isn't exactly low, either, but it's far more attractive than 43 if you have any kind of value bias at all. That said, the average utility's P/E is around 21.5 times, so Southern's ratio isn't out of line with the peer group.
For investors seeking a reasonably priced dividend-paying utility, Southern gets the nod here. NextEra is most appropriate for dividend growth investors willing to pay full price, or maybe more, for large annual dividend hikes.
3. The future of things
Electricity generation is changing, with a huge push away from dirty fuels toward cleaner and renewable options. Both NextEra and Southern are well aware of this. But they aren't taking advantage of the shift in the same way.
Southern, so far, has been happy to be a regulated utility that produces power and sells it to customers. Its big effort right now is to complete a pair of nuclear power plants that have been long delayed and over budget. The goal is to have them both up and running by the end of 2023. Given the history of their construction, though, it wouldn't be a shock if the completion date were moved into 2024. This will provide the company with years of baseload clean energy.
NextEra is really two businesses in one. It owns Florida Power & Light, the largest utility in Florida, a pretty simple regulated utility operation. However, it is also one of the largest wind and solar power producers on Earth. It is, essentially, using its regulated arm to help support the growth of its renewable power business. This is largely why NextEra has managed to grow its dividend at such a rapid clip.
It wouldn't be fair to suggest that Southern is falling behind the industry as the world shifts toward clean energy, but it certainly isn't trying to be a leader. NextEra is a leader. If that type of ESG positioning matters to you, then NextEra is the name to pick. If you prefer a company that just plays it safe, then Southern will probably be your favorite here.
Dividend growth vs. maximizing income
When you look into these two utility stocks, it is very clear that Southern is a stodgy old income stock and NextEra is an exciting income growth stock. Both are fairly well-run companies, at least when you look past Southern's costly and delayed nuclear power project (nuclear power plants are notoriously difficult to build). In the end, the selection here really comes down to what you are looking for in your utility investment. That said, if you paired them up, you'd have a nice combination of yield and dividend growth, which might be the best move.
