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Southern Stock Is a Bit Too Risky for a Utility Play

By any conventional measure Southern (NYSE:SO) is a hot utility stock. SO stock is up 20% since the start of the year, against a 16.5% gain for the average stock in the S&P 500. Yet the 60 cent per share dividend, which is covered by earnings, still yields a fat 4.7%.

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While Pacific Gas & Electric (NYSE:PCG), which tied its future to renewable energy, has gone into bankruptcy, Southern continues to stand tall.

What could possibly go wrong? To put it simply, the rise of wind and solar power.

Southern’s Nuclear Strategy

Southern is one of the largest operators of nuclear power plants in the country, with six in all.  It’s building two more, an expansion of its Plant Vogtle on the Savannah River.

Assuming the plants come on stream by 2022, Southern will have an additional 2.4 Million megawatt hours of capacity to sell, over 10% of the region’s demand.

Of course, that’s a big if. A similar nuclear expansion across the river, in South Carolina, cost $9 billion, resulted in 9 rate hikes, and was eventually abandoned. The utility company behind it was sold to Dominion Energy (NYSE:D) for $13.4 billion in cash and assumed debt.

For now Vogtle is the only nuclear power going up that qualifies under the Republican plans for “green energy,” and the project is being showered with largesse in the form of federal loan guarantees that now total $12 billion.  The expansion, originally slated to cost $14 billion, now has a budget of $28 billion.

Changing Winds

As costs for solar and wind energy continue to fall — they’re now cheaper than maintaining coal-fired power plants — the long-term fate of nuclear energy is increasingly precarious.

Southern directors see which way the wind is blowing. They recently tied CEO Tom Fanning’s pay to cuts in SO stock’s carbon footprint.  But those plans are highly dependent on finishing Vogtle and getting that energy into the grid. The riskiest operating periods for a nuclear plant are when it’s new, as the Vogtle plants will be, or when it’s past its useful life.

These are the long-term risks SO stock, and the southeastern U.S. economy, are running as construction on the plants continues.

SO Stock Earnings

Southern reported earnings May 1. Earnings per share were in line with estimates at 70 cents. Meanwhile, revenue came in a bit low at $5.4 billion instead of the expected $5.8 billion. This isn’t great, as revenues generally peak in the first quarter, which covers the winter, and the third quarter, which covers the summer.

SO stock fell about 1.7% on the news.

Analysts don’t seem to know what to think of the risk-reward balance for so, with 13 of 21 just saying hold, against 2 buyers and 5 sellers. We’ll see how that changes in light of Q1 earnings, however.

The dividend is one of the highest in the utility sector, but most stock buyers today want risk and utilities, by their nature, are not risky investments.

The red light flashing on Southern remains the debt, used to finance the nuclear power plants. It totaled $40.5 billion at the end of 2018. That debt load must be matched against the company’s equity value, $54.3 billion. Its bonds currently yield about 4.6%, close to the stock’s yield.

The Bottom Line

A recent analyst report on Southern said it offered “short-term gain and long-term pain.” That’s about right.

Southern stock has been the best-performing among the big southeastern utilities this year, outpacing NextEra Energy (NYSE:NEE), Dominion and Duke Energy (NYSE:DUK). But the debt load is huge, and Southern has already sold $12 billion in assets to keep the bonds afloat, including its solar energy portfolio and Gulf Power, which serves Florida.

For Southern stock and debt to pay off, the nuclear plants not only have to go online, but operate profitably, over decades, in an environment where solar and wind costs are continuing to decline.

That’s not a good bet for a risk-off investment.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.

Article printed from InvestorPlace Media, https://investorplace.com/2019/05/southern-stock-is-a-bit-too-risky-for-a-utility-play/.

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