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D or SO: Which Utility Stock is Better Placed for 1H20?

Zacks Equity Research

Utility stocks are among the safest investment options due to its domestic focus and steady demand irrespective of the economic cycles. Utilities are favored by investors due to stable returns and their ability to pay regular dividend, and are often treated by investors as bond substitutes.

Companies operating under this industry need to make huge investment to improve generation, strengthen their transmission and distribution lines, and use modern technologies to provide 24x7 services to clients. Ongoing investment in battery storage projects is gaining importance due to a rapid decline in costs and comparative benefits received by utility players.

Companies in this capital-intensive Zacks Utility- Electric Power industry have to raise capital from the market to fund their expenses. Rate hikes increase capital servicing expenses for these companies. However, the Federal Reserve’s present stance to keep interest rates unchanged in 2020, after lowering the same for three times in 2019, is indeed good news for the utility space.

Amid such favorable trends existing in the utility space, we run a comparative analysis of two prominent electric power utilities — Dominion Energy, Inc. D and The Southern Company SO — to determine which one is better poised right now.

Both the stocks currently carry a Zacks Rank #2 (Buy). Dominion Energy and Southern Company have market capitalization of $67.55 billion and $66.76 billion, respectively. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Growth Projection

The Zacks Consensus Estimate for Dominion Energy’s 2020 earnings is pegged at $4.36 per share on revenues of $18.82 billion. The bottom-line figure suggests a 3.56% year-over-year increase. The same for the top line calls for a 9.9% rise on a year-over-year basis.

The consensus mark for 2020 earnings for Southern Company is pegged at $3.18 per share on revenues of $22.21 billion. The bottom-line figure suggests a 2.7% year-over-year increase. The same for the top line implies a 2.49% year-over-year increase.

Earnings Surprise Trend & Long-Term Growth

Dominion Energy delivered four-quarter positive surprise of 0.1%, on average. Its long-term (three to five years) earnings growth is projected at 4.8%.

Southern Company delivered four-quarter positive surprise of 8.2%, on average. Its long-term earnings growth is pegged at 4.5%.

Return on Equity (ROE)

ROE is a measure of a company’s efficiency in utilizing shareholders’ funds. Dominion Energy and Southern Company have a trailing 12-month ROE of 11.65% and 10.52%, respectively. The industry’s ROE for the same period came in at 9.47%.

Dividend Yield

Dividend yield is the estimated one-year return of an investment in a company, based only on dividend payment.
 
Currently, the dividend yield for Dominion Energy is 4.47%, higher than 3.9% for Southern Company. Both the companies’ dividend yield is better than the industry’s 2.81%.

Debt to Capital

The debt-to-capital ratio is a good indicator of a company’s financial position and shows how much debt is used to run the business. Dominion Energy has a debt-to-capital ratio of 53.18% compared with Southern Company’s 57.67%. The utility power industry’s average debt-to-capital is 51.35%.

Price Movement

In the past 12 months, shares of Dominion Energy and Southern Company have returned 19.2% and 38%, respectively. The industry has recorded growth of 20.6% in the said period.



The Verdict

Although Southern Company’s return in the past 12 months is higher, Dominion Energy’s growth projection, long-term earnings growth, higher return on equity and lower debt to capital make it a better utility stock at the moment.

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Southern Company (The) (SO) : Free Stock Analysis Report
 
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