A common idea among amateurs in the stock market is that you have to spot the next Netflix or Facebook in order to achieve successful returns on your investments. Not only is this statement false, it’s far away from the truth. Investing is far simpler that what most people imagine. What you need to do is to buy high quality companies that are profitable, able to grow and maintain a conservative approach to taking risk. Do that and you will be in a better positon to make money in the long term.
So where can one find such companies? One sector which is often neglected is the utility sector. Ben Miller argues that the reason why so many hedge funds avoids the utility sector is because it just isn’t sexy enough. It’s essentially too boring for the star managers to consider.
But that is your edge. The efficient market hypothesis states that it is impossible to beat the market because all info is in the market, and therefore, the prices reflect that.
However, since the amount of people doing research on the FAANGs is far superior to those on Utilities, the theorem doesn’t apply as strongly to utilities.
What this means is that there are bargains to be found for observant investors.
The Best Utility Buy Right Now
Southern Company (NYSE:SO) is one of the highest ranked utilities in terms of quality and stability. The main operating areas are sales of electricity and gas. Southern Company is divided into three main segments. The Southern Power constructs and manages generation assets and sells electricity in the wholesale market. The Traditional Electric Operating Companies includes the generation, transmission and distributing of electricity. The last is The Southern Company Gas which distributes natural gas.
Naturally, you might think that this company can’t show market beating returns. Where’s the X factor? But, when we use data from 08/01/1995, one can see that Southern Company has handsomely been beating the S&P500 for more than two decades.
The firm had a total return 928.82% while the S&P500 returned 662.10%. That means that the annual return for more than 23 years was 10.61% when we include direct dividend reinvestments.
High Yield with Some Growth
Current Southern Company’s yield stands at 5.47% which is 16% above the 5-year average of 4.72%. One reason for this vastly high yield is that investors are a bit worried about the high payout ratio, which has climbed from 71% to 85%.
The main reason for the drop in the share price is that the costs of a project called Vogtle increased by $1 billion and is now double of the initial estimates in 2008. The question one needs to answer is if Southern Company can still maintain the dividend and if that yield is high enough reward to keep investors happy?
One way to look at this is to compare the Net Debt to EBIDTA and look if it is close or below our thresh hold of 5.5. Right now, the metric is 6.06 which indicates that the debt is under control and Southern Company should be able to pay the dividend for a long time.
The mean consensus among the 20 analysts following Southern Company is a hold.
The average target price is $45.9 which provides a positive 4.6% spread. The bear case is a target price of $41.00 providing a negative 6.6% spread. The bull case is a target price for Southern Company of $52 which provides a positive 18% spread.
When you include the annual dividend yield at 5.47% and a positive 4.6% spread, the total 12 months return should be close to 10% for Southern Company and thus, making it a bargain right now.
Southern Co. is an interesting investment but these MUST BUY Stocks are set to soar
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The author does not own Southern Company but may initiate a position within the next 48 hours.