Southern Company (NYSE: SO) is one of the country's largest utilities and an income-investor stalwart. As the broader market has lurched into the red this year, Southern has held up relatively well, keeping its head above water. But don't get caught up in the past -- here are three reasons Southern Company stock could fall in 2016.
Big, getting bigger
The first thing you'll want to watch at Southern is its proposed acquisition of AGL Resources (NYSE: GAS). It's a $12 billion deal, including the assumption of debt, that will marry AGL's natural gas assets with Southern's electricity-focused business. It makes a lot of sense in many ways, since natural gas is an increasingly important fuel and the merger will double Southern's customer count. In fact, Southern expects an immediate boost to earnings and is hinting that a successful completion to the deal could lead to faster dividend growth.
But as with all acquisitions, this deal has to go through a number of approval processes. Because this is a utilities merger, however, that means regulators in every state in which the pair operates have to give an OK. If that process stalls or hits a snag, investors could quickly sour on Southern's shares. Even if the deal gets the green light, however, you'll still want to watch to ensure the merger goes smoothly. Integration troubles could also lead Southern's stock lower.
Developments on development
Another big area to watch is Southern's two big construction projects. These have been trouble spots for several years, with delays, cost overruns, and write-offs grabbing investor attention and weighing on the stock. However, 2016 could be the year things start to turn around.
For example, Southern has streamlined the construction team on its big nuclear project and appears to, finally, be nearing the end of its clean coal/carbon capture project. But if either of these headline-grabbing developments falter again, investors aren't likely to react kindly. Indeed, investors have been burned before because of Southern's big spending plans and the initial reaction to further problems is likely to be sell first and ask questions later.
The last issue to watch isn't really one thing, it's more like a bunch of stuff that utilities have to deal with every day. For example, demand for Southern's electricity ebbs and flows with the weather. There's nothing the company can do about that, but it does have an impact on results and investor perceptions of the company -- Mr. Market is often shortsighted. So weather extremes could also hurt the shares even though weather is a transient issue.
Then there are regulators. Southern is a big utility with operations in multiple states and regions. And it's about to get even bigger. So Southern is always dealing with some regulatory issue, usually in an effort to increase how much customers pay. For the most part, the company has good relationships with its regulators, but with all the troubles its two big construction projects have seen and a big merger in the works, it's worth watching for signs of strain. If these relationships take a turn for the negative, investors will probably step to the exits, since such a shift could presage tougher times ahead.
Don't lose too much sleep
To be honest, these are important issues to watch, but I wouldn't stress about them. Yes, each could lead the shares to fall, but for the moment, Southern Company looks like it's on the right side of the equation on each -- with the exception of a relatively mild start to winter. In fact, for the first time in a while, Southern's future appears to be brightening as the silver linings start to overtake the clouds. Just don't get too complacent, because these are still three reasons that Southern Company stock could fall.