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Southern Company's Struggle: An Investor's Pespective

PART:
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Part 3
Southern Company's Struggle: An Investor's Pespective PART 3 OF 7

How Southern Company Is Currently Valued

Southern Company’s valuation

US utilities continue to trade at a premium to their historical valuations. Southern Company (SO), a $49-billion company, is one of them and is now trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) valuation multiple of 12.2x.

SO’s five-year historical average valuation multiple is near 11.0x, while the industry average is just over 10.0x, and so SO is trading at a premium to its historical average as well as to the industry average.

How Southern Company Is Currently Valued

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By comparison, Duke Energy’s (DUK) EV-to-EBITDA ratio is 10.2x, while Dominion Resources’ (D) ratio is 15.0x. NextEra Energy (NEE) is now trading at 12.0x. Among the top US utilities, Duke Energy seems to be trading at the fairest valuation as compared to peers.

Remember, the EV-to-EBITDA ratio gives a comparative idea of a company’s valuation, regardless of the company’s capital structure. EV refers specifically to the combination of a company’s market capitalization and debt, minus its cash holdings.

US utilities overvalued?

Many US utilities are relatively cheaper than their high valuations in 2016. The stock price corrections we’ve been seeing could be one of the main reasons behind the relatively fair valuations.

But SO appears to be trading at a premium because of its PE (price-to-earnings) multiple of 20x. Duke has a similar multiple, and historically, both have traded near a PE multiple of 15x–16x. NextEra Energy and Dominion Resources have current PE multiples above 21x.

Now let’s take a look at SO’s dividend expectations.

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