Southern Company (SO) stock had one of the best years in 2019. It gained almost 45%. The stock notably outperformed utilities at large that rose 22% last year. However, SO stock seems to have plateaued lately after a steep run. Will it continue to soar in 2020?
Southern Company stock: Concerning valuation
Currently, Southern Company stock looks to be trading at a premium against its historical average. It is trading 20 times its estimated 2020 earnings. This is much higher than the peers’ average. Also, its five-year historical average valuation comes around 17x. The stock has been rallying from close to $42-odd levels and has maintained strength almost throughout last year.
Southern Company isn’t the only one. Many top utilities seem overvalued compared to their historical averages. NextEra Energy (NEE), the largest utility stock by market capitalization, is trading 27x its forward estimated earnings for the next 12 months. Its five-year average valuation is around 20x. Renewable giant NextEra Energy rallied approximately 38% last year.
Notably, utilities are slow-growing companies. Thus, a valuation multiple of close to 20x for such slow growth, even if they offer stable dividends, seems unjustifiable. Broader markets currently have a forward valuation multiple close to 20x.
Southern Company’s earnings in 2020
More than its earnings, investors are keenly watching on Southern Company’s Plant Vogtle developments. It did not report any cost overruns or delays at its nuclear power project Plant Vogtle. Thus, this year as well, investors must be hoping for a similar performance from the only under-construction nuclear project.
According to analysts’ estimates, the utility will report total revenues of $22.7 billion in 2020. This represents a topline growth of just 2% YoY and could continue to boost the SO stock. Its earnings are estimated to stay flat at $3.34 billion in 2020, based on estimates. In 2019, Southern Company is expected to report profits of $3.36 billion, with estimates for Q4 2019.
However, investors would not mind flattish earnings growth from Southern Company. Their focus will likely be on dividend growth. In 2019, the utility paid total dividends of $2.46 per share. So, they were almost 3% higher than in 2018. Analysts expect a similar growth trend in its dividends in 2020.
Southern Company generally announces its annual dividend increase in April. Thus, if it announces any increase this year, it would be Southern Company’s 19th consecutive year of dividend raise. It has paid a cash dividend for the last 287 consecutive quarters. Its long dividend payment history suggests a stable and reliable dividend profile. Currently, SO stock is trading at a yield of 4%, higher than peers’ average of 3% at the moment.
Utility stocks (XLU) usually play out well over a longer period in terms of investors; returns due to their stable dividends. In the last decade, SO stock returned more than 200%, including dividends. A large portion of its returns came in the last year. It notably underperformed peers as well as broader markets. To learn about what drove its returns and what utility stood out last decade, read How Southern Company Stock Has Done This Decade.
SO stock may be attractive for negative events
Along with its strong run last year, Southern Company stock could be attractive in case of any extreme negative event. Its dividends look well-placed amid an above-average yield. Considering the inflated valuation, the stock might not see a big upside from the current levels. However, broader market volatility could drive investors towards defensive investments.
To learn more about Southern Company’s target prices and analysts’ views, read Analysts’ Ratings on Top Utility Stocks for 2020.