Southern Company’s valuations
Many US utilities have turned relatively cheaper compared to their towering valuations last year. Their stock price correction could be one of the main reasons behind the fair valuation.
However, Southern Company (SO) still seems to be trading at a premium compared to its historical average and the industry average. On February 22, 2017, Southern Company was trading at an EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiple of 12.0x. Its five-year historical average valuation multiple is nearly 11.0x, while the industry average is just over 10.0x.
Duke Energy’s (DUK) EV-to-EBITDA ratio is 10.5x, and Dominion Resources’ (D) is 15.0x. NextEra Energy (NEE) is trading at 12.0x. Among the top US utilities, Duke Energy seems to be trading at a fair valuation compared to its peers.
The EV-to-EBITDA ratio gives a comparative idea of a company’s valuation, regardless of its capital structure. EV is the combination of a company’s market capitalization and debt minus its cash holdings.
US utilities (XLU) appear to be trading at a marginal premium considering their price-to-earnings (or PE) multiple. Historically, they traded near a PE multiple of 15x–16x, and they are currently at ~18x. In 2016, the PE ratio of utilities was above 20x. Duke Energy and Southern Company are both currently trading at PE multiples near 19x.
To learn more about Southern Company’s dividends, read Southern Company’s Dividend Profile and Outlook for 2017.