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Southern Company Hits 52-Week High: Is Further Upside Left?

Zacks Equity Research

Shares of Southern Company SO hit a 52-week high of $54.44 on May 22, before retracting a bit to close the trading session at $53.97. The stock has rallied around 22.8% on a year-to-date basis, outperforming the broader energy industry’s growth of 10.5%. Sporting a low beta, which translates into lower volatility, and a reasonable valuation, the stock looks well poised to keep the positive momentum alive.

Let’s delve deeper to find out the factors responsible for the stock’s upsurge.

Catalysts Behind the Uptrend

One of the largest electric utility holding companies in the United States, Southern company has managed to surpass estimates in each of the last seven quarters. The company, which is focused on power generation and electricity distribution, serves the attractive Southeast market with a wide customer base.

The $12-billion AGL Resources buyout helped Southern Company to significantly increase its customer base, while diversifying business, by adding gas-distribution assets. Focus 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.

We also appreciate Southern Company’s divestment deals with NextEra Energy and Global Atlantic Financial Group, which have helped the utility to streamline its portfolio, and raise cash to repay debt and pay for the Vogtle Project’s new reactors.

As it is, investors have welcomed the huge support and encouragement from the government in the form of loan guarantees of around $12 billion for the Vogtle nuclear plant in Georgia. The aid will help the utility to reduce financing costs. Markedly, the Vogtle plant in Georgia is the only nuclear project that is currently under construction in the United States. The Vogtle plant will make the United States nuclear competitive, helping the nation to catch up with the likes of Russia and China.

Its impressive dividend record has been boosting investors’ sentiments. The company has been a windows-and-orphan stock with a long history of regular reliable dividends, and strong portfolio of state-regulated electric and gas utilities.The utility, which announced a 3.4% hike in quarterly payout last year, has paid dividends for more than 60 years in each of the last 285 quarters. As such, Southern Company’s dividend is perceived to be safe and reliable.

Does the Rally Have Legs?

While the company’s strategic strides, splendid earnings surprise record and impressive dividend payouts bode well, the elevated leverage of 60% raises a concern. Nonetheless, we believe that the company will be able to tide over weak financials in the coming years.

While we acknowledge the unanimous approval for the construction of the Vogtle plant, the decision to continue with the project may increase the credit risk of the company. However, in the recent earnings call, Southern Company stated that the Vogtle project is progressing quite well (with the completion of more than 77% work), providing respite to investors. Though the project has a long way to go before it becomes operational in 2021, the process is expected to be smooth.

As such, we advise investors to retain this Zacks Rank #3 (Hold) company in their portfolio, considering long-term prospects and the expectation that the company will keep up its impressive momentum. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Meanwhile, investors can consider some better-ranked utility picks such as Atlantic Power Corporation AT, NRG Energy, Inc. NRG and NorthWestern Corporation NWE, each sporting a Zacks Rank of 1.

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