Top regulated utility Southern Company (SO) stock continued its momentum and gained almost 3% last week. The stock does not seem to slow down despite rallying more than 35% so far this year. Utility stocks are generally very slow, and dividend payments make up a large portion of investors’ returns.
However, Southern Company’s stupendous rally this year has been outstanding, notably beating its peers. The Utilities Select Sector SPDR ETF (XLU) is up about 20% in the same period.
Southern Company stock is currently trading at $59.70, almost 5% and 14% above its 50-day and 200-day moving average levels, respectively. The strength in SO is highlighted by the large premium above its support levels.
Southern Company stock broke above its 50-day level early this year and has seen robust trading since then. This level around $57.00 could act as a support for the stock in the short term.
SO is trading almost 2% below its 52-week high hit last week. It had rallied 41% from its 52-week low of $42.50 on December 26, 2018. Southern Company stock is up more than 8% since its second-quarter earnings on July 31. It exceeded Wall Street’s EPS expectations for the quarter and reported flattish growth compared to Q2 2018.
The recent rally in Southern Company has been pushing the stock toward the overbought zone. Its 14-day RSI (relative strength index) was 67, close to an overbought level last week. An RSI above 70 implies that the stock is in the overbought zone and might see a reversal. Utility stocks at large are trading close to their respective overbought levels.
NextEra Energy (NEE) stock is also trading well above its key support levels. Its RSI was 48, indicating the stock is stable. It is up more than 25% so far this year.
Growing volatility among broader markets
Endless trade war tensions, the global slowdown, and recession fears have substantially grown uncertainties in broader markets in the last few months. So, investors took shelter in utility stocks, perceived as defensives due to their relatively higher dividend yields.
Southern Company is currently trading at a dividend yield of 4.2%, notably higher than utilities’ average yield of 3%. The biggest utility by market cap, NextEra Energy, yields 2.4%.
To learn more about top utilities’ dividend profiles, read Finding the Top Dividend Stock among Utilities.
Almost all the top utility stocks are trading at inflated valuations. Southern Company stock is also not an exception. It is currently trading 19x its earnings for the next 12 months. Its stock seems to be trading at a premium compared to its historical average.
Utility stocks at large are also trading around 19x their forward earnings. Notably, the utility is expected to show flat growth this year and 4% next year. A valuation multiple of 19x for such slim earnings growth seems exorbitant.
NextEra Energy stock is trading 25x its estimated earnings. It seems that the premium valuation could hinder utility stocks’ run going forward. Even if the Fed is expected to lower interest rates this year, lofty valuations might concern investors.
Wall Street analysts gave Southern Company stock a mean price target of $56.90, which implied an estimated downside of almost 5% for the next 12 months.
Of the 19 analysts that cover Southern Company, 12 recommended a “hold,” two recommended a “buy,” four recommended a “sell,” and one analyst recommended a “sell” on September 9.
UBS increased Southern Company’s price target from $58.00 to $62.00 on September 6. UBS also increased NextEra Energy’s price target from $240.00 to $250.00.