Southern Company (SO Quick QuoteSO - Free Report) has been on a remarkable run this year. The stock surged 18.1% year to date. This stellar performance far outpaces the broader utility sector, which has gained just 8.8% in the same period. SO has outshined key competitors in the Electric Power utility sub-industry space, such as DTE Energy Company (DTE Quick QuoteDTE - Free Report) , CenterPoint Energy, Inc. (CNP Quick QuoteCNP - Free Report) and IDACORP, Inc. (IDA Quick QuoteIDA - Free Report) . This raises an interesting question for investors: Is now the right time to buy or hold the stock?

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SO’s Legacy of Growth and Stability

Founded in 1945 and based in Atlanta, GA, SO has built a formidable presence in the U.S. utility sector. The company serves nearly 9 million customers across its seven electric and natural gas distribution units. With a diversified energy portfolio, SO operates a capacity of 46,000 megawatts, supported by a vast infrastructure that includes 200,000 miles of electric transmission lines and more than 80,000 miles of natural gas pipelines.

Notably, SO is not just an electricity supplier, it is a diversified energy giant. From traditional coal, natural gas and nuclear plants to renewable hydroelectric power, SO has a wide array of assets driving its bottom line. The 2016 merger with AGL Resources further strengthened SO’s reach, expanding into wholesale electricity, natural gas services and energy storage operations. SO represents a dynamic blend of stability and growth potential for investors, backed by its extensive market share and diverse energy offerings.

With shares soaring year to date, investors are now left wondering, is there still time to dive in or should they hold off? Let us explore the factors at play and the importance of this growth in investment strategy.

What Is Favoring SO Stock?

Reliable Regulated Business Model: Approximately 90% of SO’s earnings stem from state-regulated electric and gas utilities. This ensures predictable revenue streams, supported by regulatory mechanisms that allow for cost recovery and rate adjustments. This stability makes it a low-risk investment suitable for conservative investors.

Strong Dividend Yield: SO’s dividend yield, currently above the S&P 500’s average, makes it attractive for investors looking for income. The company has consistently increased its payout, signaling management’s confidence in future cash flows.

Strategic CapEx and Electric Load Growth:  Southern’s $48 billion capital expenditure plan (2024-2028) focuses on regulated utilities with investments in grid resilience and renewable energy. The plan targets a long-term EPS growth rate of 5-7%, driven by strong electric load growth estimated at 6% annually from 2025 to 2028.  With a strategic focus on sustainable growth and innovation, SO is well-positioned to deliver long-term value for investors.

Expanding Customer Base in High-Growth Regions: SO operates primarily in the Southeastern United States, a region characterized by economic growth and population inflows. The company added 12,000 new residential electric customers and 7,000 new gas customers in third-quarter 2024. This growth is complemented by increasing demand in industrial and commercial segments, particularly in data centers, which saw a 10% rise in energy usage year over year in the recent quarter. These demographic and economic trends create a robust pipeline of future energy demand, ensuring steady revenue growth.

While SO offers an appealing investment profile with its reliable revenue model and strong growth prospects, there are certain risks that may concern investors.

Red Flags for Southern Company

High P/E Ratio Signals Potential Overvaluation: Another key concern about SO is its high P/E ratio of 21.66, which is above the sector’s average of 15.86. This indicates that investors might be overestimating the company's growth potential. Given the risks associated with volatile natural gas prices and the substantial costs tied to projects like the Plant Vogtle nuclear expansion, the current valuation may not be justified.

If these challenges lead to earnings pressure, the stock price could take a hit. As a result, investors might want to think before jumping in, as there are signs that the stock could be overvalued right now.

Debt and Interest Rate Sensitivity: SO has significant exposure to rising interest rates. Higher debt servicing costs impacted third-quarter 2024 earnings and remain a headwind amid the current rate environment.  As utility stocks are traditionally valued for their dividends, increased borrowing costs could challenge the company’s ability to maintain its growth in payouts.

Flat or Declining Usage Per Customer: While the company is adding new customers, weather-normalized residential electricity usage per customer has been flat or slightly declining. This could limit revenue growth unless industrial and commercial demand compensates.

Limited Non-Regulated Growth: Southern Power, the company’s non-regulated business segment, remains a small part of the overall revenue mix. While the segment provides stable cash flows through long-term contracts, its growth potential is limited compared with the regulated utilities.

Final Thoughts for SO Stock

Southern stock offers stability with its regulated business model, strong dividend yield and strategic investments in grid resilience and renewable energy. It benefits from expanding customer bases in high-growth regions and increasing demand from sectors like data centers. However, risks include a high P/E ratio indicating potential overvaluation, sensitivity to rising interest rates and flat per-customer usage could limit growth. Additionally, its non-regulated business has limited expansion potential.

Of the 21 brokers covering SO stock, eight have rated it as a Strong Buy, one as a Buy, 11 as a Hold and one as a Sell. Given this mix of strengths and potential challenges, investors should wait for a more opportune entry point instead of adding this Zacks Rank #3 (Hold) stock to their portfolios.