The case for letting it cool
Is nuclear a risk for Southern? Not in terms of pricing, since Southern is far from having Exelon Corporation (NYSE:EXC)’s exposure to nuclear. Even when the two new reactors come online in Georgia in 2018, only 12% of the company’s generation will come from nuclear. Although building nuclear facilities represents the bulk of costs associated with atomic energy, the short-term situation taking hold of the industry has forced Exelon Corporation (NYSE:EXC) to cut its dividend. However, The Southern Company (NYSE:SO) shouldn’t face the same competition from wind thanks to its distance from the nation’s Wind Belt.
The bad news may lie in the company’s dependence on coal generation. Yes, coal is ridiculously cheap right now. Yes, it will continue to buffer rising natural gas prices. The problem is that the country’s largest coal regions aren’t very far from the largest shale gas reserves. That’s potentially some pretty bad news for Duke Energy Corp (NYSE:DUK) and Southern, which rely on coal for 46.2% and 36% of generation, respectively.
So far, a loss of appetite for coal power in recent years hasn’t hurt The Southern Company (NYSE:SO) or Duke Energy Corp (NYSE:DUK): Each has more than doubled the returns of the S&P 500 in the past five years. Will they have time to continue their transition to other sources of energy? Or will the long-term slide catch up with them in the end? I’m not so sure coal will ever regain its dominant share of American energy generation with continually low natural gas and decreasing costs of renewable energy. Investors will have to keep an eye on the costs of retiring coal plants or even writing off the assets altogether.
Foolish bottom line
Do the risks outweigh the rewards for investors in The Southern Company (NYSE:SO) stock? If the past five years are any guide, then it appears coal is not going to derail earnings growth. I also don’t see the company’s low-cost nuclear power being as risky as others believe. Long-term investors shouldn’t have any problem capturing gains from this leader in American energy. I can’t promise that shares won’t cool off from their all-time highs in the near term, but timing the market isn’t a major concern for buy-and-hold investors.
The article Is Southern Company Stock Too Hot to Touch? originally appeared on Fool.com.
Fool contributor Maxx Chatsko has no position in any stocks mentioned. Check out his personal portfolio or his CAPS page, or follow him on Twitter, @BlacknGoldFool, to keep up with his writing on energy, bioprocessing, and emerging technologies.The Motley Fool recommends Exelon and Southern.
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