The Southern Company (SO), Duke Energy Corp (DUK): Which Utility Is Worth Buying?

Page 1 of 2

Utilities are the classic “widow-and-orphan” stocks. This phrase is most closely associated with stocks that provide reliable returns over time, ideal for investors who shy away from volatility. For investors who value stocks that pay high dividends, such as those investors in or nearing retirement, utilities have been relied upon as steady providers of dependable income for many decades.

The Southern Company (NYSE:SO)

While earnings per share growth isn’t going to take anyone’s breath away, utilities operate in a highly regulated industry and thus aren’t likely to collapse. Utilities are therefore critical to the prosperity and security of the nation. Even in a dire economy, utilities provide investors the certainty of reliable earnings and dividends.

There are many publicly traded utility stocks for investors to choose from. Two of the most well-known are The Southern Company (NYSE:SO) and Duke Energy Corp (NYSE:DUK), which both provide dependable results and carry hefty dividend yields. Are these two worth buying? Or is there a better utility to buy today?

The downside of slow-and-steady stocks

As previously mentioned, utilities are valued highly by many investors for their strong dividend yields and reliable results. These stocks are also not very volatile, which helps investors sleep at night, knowing they likely won’t wake up the next day to find their utility stock had gone out of business.

There’s of course a cost for this dependability, which in the case of utility stocks, is low growth. The Southern Company (NYSE:SO) and Duke Energy Corp (NYSE:DUK) both yield in excess of 4% at recent prices, but they have been slow to grow their dividends over the past several years.

In fact, five-year compound annual growth in dividends for The Southern Company (NYSE:SO) and Duke Energy Corp (NYSE:DUK) is just 4% and 3%, respectively.

Moreover, earnings growth for Southern and Duke Energy Corp (NYSE:DUK) going forward isn’t likely to justify the fairly exorbitant valuations both stocks enjoy. The Southern Company (NYSE:SO) reported fiscal 2012 earnings per share grew 5%, while Duke Energy’s adjusted diluted EPS actually fell 1% last year.

However, none of this should be taken as a surprise. Utilities are never going to be high-growth stocks. What disturbs me most about The Southern Company (NYSE:SO) and Duke Energy Corp (NYSE:DUK) are their valuations.

Each stock has rallied considerably over the past couple years. As a result, investors are now paying hefty prices for these stocks in search of yield. To illustrate, consider that each of these two stocks currently trades for more than 18 times trailing EPS. Plainly stated, there isn’t much underlying value left in these two stocks.

There are still reasonably priced utility stocks out there

Fortunately for investors, not all utilities trade in excess of 18 times trailing earnings while simultaneously offering little underlying growth.

Page 1 of 2

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
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

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

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 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!