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Southern Company at Crossroads: Can Strategic Strides Aid?
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Southern Company (SO - Free Report) is among the few stocks that are displaying mixed sentiments. While we remain concerned of the company’s cost-overrun issues and elevated leverage, its commitment toward healthy dividend payouts, along with the recent divestment initiatives provide a ray of hope.
Notably, the shares of this utility stock have declined around 14% in a year vis-à-vis the stocks in this industry that have collectively lost 9.4%.
Let’s delve deeper to find out the pros and cons of the stock.
Major Deterrents
High Debt Raises Red Flag: Per the company’s last reported numbers, long-term debt came in at $44.4 billion, representing a debt-to-capital ratio of more than 63%. Apart from a rise in immediate finance costs, the high debt level will also require significant cash flow for repayments.
Ballooning Cost of Construction Projects: Southern Company is bearing the brunt of continued delays and cost overruns in two of its large construction projects — Vogtle and Kemper — that have weighed on Southern Company's fortunes.
Though Southern Company won Georgia PSC's nod for the construction of the Vogtle plant, the project is bankrolled with more than $8 billion in federal loans and loan guarantees. This is likely to hurt the utility's already weak financials. On the other hand, the Kemper Project has also been facing continuous criticism owing to its poor execution, escalating costs and multiple delays. The price tag of the project that had been estimated at $3 billion in 2010 has exceeded $7.5 billion. Moreover, with the suspension of all coal gasification operations, the Kemper project will now run as natural gas facility.
Can Divestment Strides Keep Hurdles at Bay?
Last month, Southern Company inked a $6.5 billion deal to divest stakes in several of its Florida assets to U.S.-based wholesale electricity supplier, NextEra Energy, Inc. (NEE - Free Report) . It also signed another agreement to jettison one third stake in its solar portfolio to Global Atlantic Financial Group Ltd., a retirement, life and reinsurance company.
Grappling with financial challenges, Southern Company is currently heading toward the retrenchment road. The deal seems to be a prudent decision. Apart from bolstering financials to some extent, the deal will help in streamlining its portfolio. The deal will also help raise cash to repay debts and pay for the new reactors of the Vogtle Project. With limited cash flow and large amounts of investment to make, the deal would surely provide some relief to the company.
Investments in Natural Gas Also a Positive
While Southern Company is mainly focused on power generation and electricity distribution, serving the attractive Southeast market with a wide customer base, its foray into natural gas also bodes well.
The buyout of energy services holding company, AGL Resources Inc., in 2016 has helped Southern Company significantly increase its customer base, while diversifying business by adding gas-distribution assets. Focusing on natural gas is likely to help the utility gain significant operational and commercial synergies in the long run. The company aims to invest around $6 billion in its state-regulated gas portfolio through 2022.
That’s Not All
With their regulated business models and stability in earnings, utilities are among the most consistent dividend stocks in the market. Southern Company’s attractive dividend yield of 5.4% is much higher than the industry's average of 3.7% and also ahead of notable peers like Duke Energy Corporation (DUK - Free Report) and Dominion Energy, Inc. (D - Free Report) . In April, the company announced a 3.4% hike in its quarterly dividend. Notably, the hike marked the 282nd consecutive quarter of uninterrupted dividend payment by the utility.
To Conclude
Southern Company’s failed attempt to open the way for clean coal project along with construction of expensive nuclear reactors amid high debts dampen investors’ confidence, as is evident from its share performance. However, we believe that the company’s overall business is still strong and is likely to get buoyed up by its recent investments in natural gas. Thus, we think that its strategic strides, steady business model and attractive dividend payouts still hold promise for long-term growth.
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
Image: Bigstock
Southern Company at Crossroads: Can Strategic Strides Aid?
Southern Company (SO - Free Report) is among the few stocks that are displaying mixed sentiments. While we remain concerned of the company’s cost-overrun issues and elevated leverage, its commitment toward healthy dividend payouts, along with the recent divestment initiatives provide a ray of hope.
Notably, the shares of this utility stock have declined around 14% in a year vis-à-vis the stocks in this industry that have collectively lost 9.4%.
Let’s delve deeper to find out the pros and cons of the stock.
Major Deterrents
High Debt Raises Red Flag: Per the company’s last reported numbers, long-term debt came in at $44.4 billion, representing a debt-to-capital ratio of more than 63%. Apart from a rise in immediate finance costs, the high debt level will also require significant cash flow for repayments.
Ballooning Cost of Construction Projects: Southern Company is bearing the brunt of continued delays and cost overruns in two of its large construction projects — Vogtle and Kemper — that have weighed on Southern Company's fortunes.
Though Southern Company won Georgia PSC's nod for the construction of the Vogtle plant, the project is bankrolled with more than $8 billion in federal loans and loan guarantees. This is likely to hurt the utility's already weak financials. On the other hand, the Kemper Project has also been facing continuous criticism owing to its poor execution, escalating costs and multiple delays. The price tag of the project that had been estimated at $3 billion in 2010 has exceeded $7.5 billion. Moreover, with the suspension of all coal gasification operations, the Kemper project will now run as natural gas facility.
Can Divestment Strides Keep Hurdles at Bay?
Last month, Southern Company inked a $6.5 billion deal to divest stakes in several of its Florida assets to U.S.-based wholesale electricity supplier, NextEra Energy, Inc. (NEE - Free Report) . It also signed another agreement to jettison one third stake in its solar portfolio to Global Atlantic Financial Group Ltd., a retirement, life and reinsurance company.
Grappling with financial challenges, Southern Company is currently heading toward the retrenchment road. The deal seems to be a prudent decision. Apart from bolstering financials to some extent, the deal will help in streamlining its portfolio. The deal will also help raise cash to repay debts and pay for the new reactors of the Vogtle Project. With limited cash flow and large amounts of investment to make, the deal would surely provide some relief to the company.
Investments in Natural Gas Also a Positive
While Southern Company is mainly focused on power generation and electricity distribution, serving the attractive Southeast market with a wide customer base, its foray into natural gas also bodes well.
The buyout of energy services holding company, AGL Resources Inc., in 2016 has helped Southern Company significantly increase its customer base, while diversifying business by adding gas-distribution assets. Focusing on natural gas is likely to help the utility gain significant operational and commercial synergies in the long run. The company aims to invest around $6 billion in its state-regulated gas portfolio through 2022.
That’s Not All
With their regulated business models and stability in earnings, utilities are among the most consistent dividend stocks in the market. Southern Company’s attractive dividend yield of 5.4% is much higher than the industry's average of 3.7% and also ahead of notable peers like Duke Energy Corporation (DUK - Free Report) and Dominion Energy, Inc. (D - Free Report) . In April, the company announced a 3.4% hike in its quarterly dividend. Notably, the hike marked the 282nd consecutive quarter of uninterrupted dividend payment by the utility.
To Conclude
Southern Company’s failed attempt to open the way for clean coal project along with construction of expensive nuclear reactors amid high debts dampen investors’ confidence, as is evident from its share performance. However, we believe that the company’s overall business is still strong and is likely to get buoyed up by its recent investments in natural gas. Thus, we think that its strategic strides, steady business model and attractive dividend payouts still hold promise for long-term growth.
Southern Company currently carries a Zacks Rank #3 (Hold) and has a long-term EPS growth rate of 4.50%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
Click for details >>