The Southern Company (SO): The Wait For Fair Valuation Is Over

In tandem with the consistent earnings growth, Southern Company’s shareholders have enjoyed a compound annual return of 5.5% which correlates closely with the 3.2% growth rate in earnings per share. A hypothetical $10,000 investment in Southern on 12/31/1998 would have grown to a total value of $21,866.87, without reinvesting dividends. Said differently, Southern Company’s shareholders have enjoyed total returns that were roughly 1.5 times the value that would have been achieved by investing in the S&P 500 over the same time period. It’s also interesting to note that an investor would have received about 3.5 times the amount of dividend income compared to the index as well.

Looking to the Future

But of course – as the saying goes – past performance does not guarantee future results. Thus while a strong operating history provides a fundamental platform for evaluating a company, it does not by itself indicate a buy or sell decision. Instead an investor must have an understanding of the past while simultaneously thinking the investment through to its logical, if not understated, conclusion.

In the opening paragraphs a variety of potential risks were described. It follows that the probabilities of these outcomes should be the guide for one’s investment focus.  Yet it is still useful to determine whether or not your predictions seem reasonable.

Twenty-two leading analysts reporting to Standard & Poor’s Capital IQ come to a consensus 5-year annual estimated return growth rate for Southern Company of 4.7%. In addition, Southern is currently trading at a P/E of 15, which is inside the “value corridor” (defined by the orange lines) of a maximum P/E of 18. If the earnings materialize as forecast, Southern’s valuation would be $51.37 at the end of 2018, which would be a 9.2% annualized rate of return including dividends. A graphical representation of this calculation can be seen in the Estimated Earnings and Return Calculator below.

Now, it’s paramount to remember that this is simply a calculator. Specifically, the estimated total return is a default based on the consensus of the analysts following the stock. The consensus includes the long-term growth rate along with specific earnings estimates for the two upcoming years. Further, the dividend payout ratio is presumed to stay the same and grow with earnings. Taken collectively, this graph provides a very strong baseline for how analysts are presently viewing this company. However, a F.A.S.T. Graphs’ subscriber is also able to change these estimates to fit their own thesis or scenario analysis.