Today’s low interest rate environment is causing some stocks to rise because they offer investors a superior yield to what they can get elsewhere. If there is one sector of the market that worries me, it’s the utilities industry. Investors seem to have forgotten that utilities usually act like interest rate cyclicals, and when interest rates inevitably rise, these stocks could take a beating. That being said, many investors still like the stability and predictability of the industry, and if you are going to pick a stock in this industry, you might as well pick the best one, right? In my eyes the best utility stock today is The Southern Company (NYSE:SO).
Risk Versus Reward
The biggest risk facing utility stocks is interest rate risk as I mentioned. However, investors should be aware that other risks face utility stocks as well. The rise of energy awareness threatens to cut consumption, which is critical to a utility’s growth. Consumers and businesses alike are more aware of energy efficiency, and building systems, appliances, computers, and other items are all becoming more energy efficient.
A secondary risk to these utilities is connected to interest rates as well. Most utilities use long-term debt to fund their projects, and unlike consumer debt that may be locked in at a fixed rate for many years, corporate debt is rarely locked in for an extended amount of time. As rates rise, this corporate debt will be re-priced, and the company’s cost of operations will increase.
The point is, investors buying utility stocks today need to be aware that the yield they receive from these companies today isn’t enough of a reason by itself to invest.
If You Are Willing To Take The Risk, Invest In The Best
For investors who plan on holding a utility stock for a while, reinvesting the dividends, and hoping for the best, I would suggest Southern Co. To be fair, it’s not that The Southern Company (NYSE:SO)’s peers aren’t worthy of investigation, it’s just that Southern Co. does so many things better.
Companies that are usually mentioned in The Southern Company (NYSE:SO)’s peer group would be names like Duke Energy Corp (NYSE:DUK), Exelon Corporation (NYSE:EXC), and Consolidated Edison, Inc. (NYSE:ED). Each of these companies is a large utility that dominates their respective markets. That being said, the first reason I consider Southern Co the best is the most obvious, they have the highest yield.
Most investors are buying utility stocks for yield, so why not start with the highest payout of their peer group? At current prices, The Southern Company (NYSE:SO)’s yield is about 4.65%, which is just slightly higher than Duke Energy Corp (NYSE:DUK) at 4.57%, Consolidated Edison, Inc. (NYSE:ED) at 4.35%, or Exelon Corporation (NYSE:EXC) at about 4%. The highest yield doesn’t guarantee investors a winner, but in this case it just so happens that the best company also pays the most.
The second reason to consider The Southern Company (NYSE:SO) is the company is expected to grow earnings faster than their peers over the next few years. The average analyst expects the company to report EPS growth of just under 5%. By comparison, Duke Energy Corp (NYSE:DUK) is expected to grow earnings by about 4%, Consolidated Edison, Inc. (NYSE:ED) is expected to grow by about 2.3%, and Exelon Corporation (NYSE:EXC) is actually expected to show an earnings decline of about 3.4%.