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SO Will Be the Second-Largest Utility with AGL Resources

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Jan. 13 2016, Updated 2:21 p.m. ET

Market performance

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.

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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.

Duke Energy (DUK), the largest utility by market capitalization, showed a dismal performance and returned -11% last year. Peer NextEra Energy (NEE) posted 0.3% returns.

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.

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