Southern Company: An American energy titan (Part 15 of 17)
Valuation metrics
Investors value a company based on its future earnings potential. Earnings of regulated utilities are largely stable and capped on the upside due to the cost-based pricing of the electricity sold by them. Thus, price-to-earnings (or PE) multiple can also be used to value these companies alongside enterprise value (or EV) to earnings before interest, tax, depreciation, and amortization (or EBITDA).
How street values regulate utilities
Southern Company (SO) trades at a forward EV/EBITDA of 9.4x and PE of 16.3x. This is in line with its closest peer, Duke Energy (DUK).
Companies operating in the regulated segment enjoy a premium in valuation due to a lower risk to their businesses. The forward EV/EBITDA of Calpine Corporation (CPN), Exelon Corporation (EXC), and NRG Energy (NRG) is relatively lower than that of regulated utilities.
Among regulated utilities, Dominion Resources (D) trades at a higher valuation multiple than others. It trades at an EV/EBITDA multiple of 11.7x and forward PE of 19.2x. This premium can be explained by Dominion’s entry into the export of liquefied natural gas (or LNG), which has the potential to unlock a lot of value for the stock.
Southern Company’s dividend yield looks attractive
Dividend income is one of the key reasons to invest in the power sector. Regulated utilities pay steady income to shareholders and have a higher dividend payout ratio than power companies operating in the unregulated segment.
From an income investor’s standpoint, Southern Company looks attractive with a dividend yield of 4.4%, which is higher than its peers. Investors looking to invest in a basket of power utility companies can invest in the Utilities Select Sector Standard & Poors depositary receipt (or SPDR) (XLU).
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