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 Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools 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!