The markets have been signaling that a correction is underway, and despite the recent bounce, further downside may be ahead for investors.
One of the best ways to ensure that you maintain stable returns is to invest in dividend paying stocks.
In the midst of market chaos, one utility company with steady, long-term gains offers investors a safe haven while providing a hefty income stream.
A Growing Utility Company With Strong Defensive Capabilities
Southern Company (SO) is an $80 billion regulated electric utility company that services Alabama, Georgia, Illinois, Mississippi, Tennessee, and Virginia. In terms of its customer base, it is the second largest utility company in the United States.
The company reported a first quarter earnings beat of $0.97 per share compared to the analysts estimate of $0.90 per share.
Operating revenues surprised on the upside as well at $6.6 billion compared to last year’s $5.9 billion for the first quarter. Higher fuel costs helped drive profits while strong economic conditions drove higher energy consumption.
There are several catalysts for Southern Company moving forward.
The first is the rising costs of fuel due to geopolitical tensions surrounding Russia and the EU and inflation. The company can pass on any increase in costs to its customer base making rising costs a benefit to their bottom line.
Other catalysts include a higher demand for energy thanks to the continued strength of the post-COVID recovery.
Finally, the business of electric utilities make it resilient in the face of adversity – in economic downturns or inflationary environments, energy costs can be passed straight through to its customer base since energy is a product that is needed regardless of how the economy is performing.
In April, Credit Suisse initiated coverage with an “underperform” recommendation but gave it a price target of $77 per share.
The Fundamental Case
The stock trades very cheaply at just 22 times earnings compared to the conventional electricity industry average of 41 times earnings.
The long-term projected EPS growth rate of 7% gives it a PEG ratio of just over 3 – relatively low for a utility stock.
Of course, the most appealing part of the stock is its beefy 3.58% dividend yield which provides investors with a solid income stream and helps protect against growing market volatility.
The Technical Case
The chart for Southern Company is quite bullish with a steady upward trajectory and a solid year-to-date gain of about 11%.
The 20-day SMA is trending above both the 50-day and 200-day SMAs while a sharp uptick last week was accompanied by higher-than-average trading volumes.
One thing investors should note is the relatively high RSI of 60. While it’s not quite into “overbought” territory, it could pull back a bit before continuing to rise.
The Bottom Line
Based on Southern Company’s full year EPS estimates, this stock should be fairly valued at around $82 per share – a gain of nearly 12% with the dividend reinvested.
Investors looking for a stable dividend paying stock to help mitigate risk and volatility will want to take a closer look at this utility staple.
The above analysis of Southern Company (SO) was provided by financial writer Daniel Cross.
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