Duke Energy (DUK) and Southern Company (SO) have aimed for earnings growth of 4%–6% per year for the next few years. Duke Energy intends to invest ~$37.0 billion, while Southern Company’s planned investments of $38 billion for the next few years will likely achieve the moderate earnings growth target. Their large regulated operations enable stable and predictable earnings. Both companies’ dividend growth is expected to be 4%–6% per year, which is in line with the industry average.
Southern Company stock has risen more than 20% in the past 12 months. Currently, Southern Company is trading close to its all-time high. The stock is trading at a forward PE ratio of 17x based on its earnings estimates for 2019. In comparison, utilities (XLU) as a whole are trading at an average forward PE ratio of ~18x.
Southern Company stock seems to be trading at a discounted valuation compared to its peers and its historical average of 20x. However, the stock looks expensive given its trivial earnings growth expectations for the next year.
Duke Energy stock is trading at a forward PE ratio of 18x compared to its five-year average PE ratio of 21x. Duke Energy stock also looks fairly valued compared to its peers. Duke Energy’s slower earnings growth might not justify its valuation.
Despite their premium yields, Southern Company and Duke Energy appear to be trading at a premium due to slower potential earnings growth.