The Best Of The Bubble Stocks: The Southern Company (SO), Consolidated Edison, Inc. (ED) and More

Page 1 of 2

I’ve made no secret of the fact that if there is a dividend bubble in the market, it seems likely that this bubble rests squarely above the utilities industry. While it’s true that utilities offer yields that are far superior to many other seemingly “safe” investments like CDs and bonds, they are not without risk. It seems that these stocks are being bid up to their current prices based on yield alone. However, if you want exposure to a utility stock in your portfolio, one of the best options might be The Southern Company (NYSE:SO).

The Southern Company (NYSE:SO)This Sounds Familiar
Utilities have long been bought to add safety and yield to a portfolio. However, in the current environment, I can’t help but hear Peter Lynch in the back of my mind. He mentioned that before the 1987 stock market crash, some slow growing companies were trading for 10 or 15 times earnings, yet they were only expected to grow EPS by single digits. He went on to say, that in his view a company’s stock should trade at a P/E ratio equal to their expected growth rate. He also said when slow growing companies are trading for growth stock multiples, investors need to be cautious. Tell me if any of this sounds familiar?

Today’s market holds several utilities in high regard, and their shares trade for P/E ratios reserved for faster growth companies. For instance, Southern Co. trades for a forward P/E ratio of 15.81, Duke Energy Corp (NYSE:DUK) trades for 15.8, Consolidated Edison, Inc. (NYSE:ED) sells for 14.8 times earnings, and Exelon Corporation (NYSE:EXC) still trades for over 12 times earnings. With analysts calling for negative growth at Exelon, to mid-single digit growth (4.86%) at Southern Co., these companies aren’t expected to set the world on fire. The bottom line is, these stocks are not traditionally cheap, and investors need to know what they are paying for.

The Yield Is Top Notch
For all of this caution, there is some good news at least for Southern Co. investors. First, the company pays the highest “safe” yield of the group. I know that Exelon investors are crying foul right now, but notice I added the word “safe” to my description of Southern Co.’s yield. Like it or not, there is a dark cloud hanging over Exelon today.

Exelon’s CEO Christopher Crane said that the company might, “revisit our dividend policy.” He specifically mentioned that pricing would need to play out the way the company expected. If pricing did not come in according to expectations, the dividend could be at risk.

With Exelon effectively removed from the conversation, this leaves Southern Co.’s yield of 4.49% at the top of the heap. Duke is very close behind at 4.44%, and Consolidated Edison pays 4.27%. These yields might sound interchangeable, until you realize that these companies have very different growth rates.

Better Growth And Margins Too
While an expected growth rate of 4.86% doesn’t sound like much, in light of 2.4% or 2.95% growth, I’ll take it. Unfortunately, Exelon shareholders are knocked out of this comparison, as analysts expect the company’s earnings to shrink in the next few years. Southern Co. is expected to grow earnings by 4.86%, Duke is expected to post growth of 2.95%, and Consolidated Edison is expected to grow by 2.4%.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

Rito Pls Buff: The 10 Least Played Champions in LoL Season 4

10 Covers of Popular Songs that are Better than the Originals

Must See TV: The 9 Most Anticipated Shows of 2015

The 15 Biggest Box Office Bombs of All Time

10 Things The World Can’t Stand About Americans

Picture Perfect: The 6 Smartphones with the Best Cameras

The 10 Best Countries To Work In the World

A Profitable Day At The Track: 5 Tips For Betting On Horses

Tearing You Apart: 6 Bad Habits That Ruin Relationships

Learning on the Job: The 6 Biggest Mistakes Parents Make

Shopaholics Rejoice: The 12 Biggest Malls in the World

Fright Night: 10 Horror Movies Based on True Stories

Mach Mania: The 10 Fastest Jets in the World

Military Heavyweights: The 10 Countries with the Most Tanks

All In: The 7 Richest Poker Players in the World

Abracadabra: The 10 Best Magicians in the World

The 10 Richest Asian Countries in the World in 2014

Eyes in the Sky: 10 Things You Need to Know About Drones

Rising Stars: The 6 Best Silicon Valley Startups

Military Muscle: The 5 Most Advanced Armies in South America

All that Glitters: The 7 Most Luxurious Jewelry Brands in the World

5 Things You Didn’t Know About ISIS but Should

Empowering Your Money: The 5 Best Energy Stocks to Invest In

The 11 Best Android Apps You Can’t Get on iOS

The 10 Most Important International Conflicts in 2014

Mood Enhancers: The 20 Most Uplifting Songs of all Time

Lover Beware: The 8 Countries that Cheat the Most

Breath of Fresh Air: The 25 Countries with the Best Air Quality on the Planet

Singles Beware: The 8 Worst Mistakes Made on First Dates

Healthy and Happy: The 10 Countries with Lowest Healthcare Costs

The 6 Best Company Team Building Activities to Build Workplace Camaraderie

Ships Ahoy: The 10 Busiest Shipping Ports in the World

10 Productivity Tips to Save You Time and Help You Do More With Less

Grab a Bite: The Most Popular Fast Food Restaurants in America

Friday Night Thirst: The 10 Most Popular Cocktails in the World

The 6 Greatest Unsolved Mysteries We May Never Figure Out

7 Useless Products You Never Should’ve Bought

The 5 Reasons Why You’re Single and Miserable

The 7 Most Addictive Foods in the World We Can’t Stop Eating (Even Though We Should)

5 Amazing Places You Can Swim with Dolphins

The Top 7 Most Livable Countries In The World

The 10 Most Expensive Baseball Cards Ever Pulled From A Pack

The 5 Easiest Second Languages to Learn for English Speakers

Silver Spoon: The 6 Richest Families in the World

The 20 Countries with the Largest Prison Populations in the World

The Top 10 Richest Actors in the World

The 10 Best Airline Stocks to Invest In Before They Fly Too High

Burger Kings: The 10 Most Expensive Burgers in the World

The 10 Most Ethnically Diverse Countries in the World

The 10 Most Exclusive Credit Cards in the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!