Conservative investors prefer utilities because of their attractive dividend yields. However, the possibility of interest rate hikes made utilities lackluster last year. Utility stocks (IDU) corrected 8% on average in 2015.
Total return analysis
The above chart shows the total return comparison between utility giants and the sector as a whole. Shares of Southern Company (SO) fell ~6% during the year. SO distributed a $2.15 per share dividend in 2015. Thus, it returned -0.6% last year considering dividends.
Utility ETF (XLU) returned -5.5% in comparison. XLU invests ~8% of its holdings in Southern Company. A company’s total return is measured as the total of its stock price appreciation and its dividends during a specific period.
AGL Resources acquisition
Eyeing the slow growth in the electric business, Southern Company agreed to buy natural gas utility AGL Resources (GAS) for ~$12 billion in August 2015. After the acquisition, SO is expected to serve nine-million customers collectively, making it the second-largest utility by customer base. Currently, Exelon (EXC) is the largest utility in the United States by customer base.
Southern Company expects its long-term annual earnings growth to accelerate to 4–5% with this acquisition. The combination will put SO in a better position to expand its energy portfolio. The deal is expected to complete in the second half of 2016.