Southern Company SO, a major player in the utilities sector, operates through its subsidiaries in the generation, transmission and distribution of electricity. It owns and manages a diverse range of power generation assets, including nuclear, coal, hydro, solar, wind and battery storage facilities. The company serves about 8.9 million electric and gas customers across various states, including Georgia, Alabama and Tennessee.

With investments in natural gas distribution, renewable energy and distributed energy solutions like microgrids, SO is positioning itself as a leader in the energy transition. SO’s strategic importance lies in its broad portfolio of energy assets and its commitment to energy innovation, particularly in renewable energy and grid resilience. The company’s scale and extensive infrastructure make it a key player in the U.S. energy landscape, giving it a unique position in the market.

For investors watching SO, the question is whether now is the right time to buy or hold. With the company’s solid reputation in the utilities sector and its impressive portfolio of energy assets, this is no surprise that many are curious about the future performance of SO stock. While SO presents several growth opportunities, it also faces challenges that could affect its valuation in the near term. Let us dive into what is currently helping SO stock and what could raise concerns for potential investors.

What is Favoring SO Stock?

Positive Earnings and Revenue Trends: SO’s third-quarter 2024 operating revenues grew 4.2% year over year to $7.3 billion, indicating solid demand despite economic challenges. Year-to-date revenues increased 6.1% compared with the same period in 2023, highlighting a resilient business model. Moreover, SO is expected to see earnings growth of almost 6.6% in 2025.

Image Source: Zacks Investment Research

Find the latest EPS estimates and surprises on Zacks Earnings Calendar.

Experience in Advanced Energy Solutions: With decades of experience deploying nuclear, renewables and natural gas technologies, Southern is well-positioned to adapt to the evolving energy landscape. The company’s leadership in projects like Plant Vogtle demonstrates its expertise in executing complex, high-stakes energy initiatives.

Growing Demand for Data Center Power: Data centers, a rapidly expanding segment in the digital economy, increased their energy consumption within SO’s commercial class by 10% year over year in third-quarter 2024. This trend indicates strong, sustained demand from technology-driven industries, positioning SO to capitalize on the growth of the sector.

Strong Dividend Yield: SO has a strong track record of paying dividends consistently. In April 2024, the company raised its dividend by 2 cents per share, bringing the annualized rate to $2.88. This marks the 23rd consecutive year of dividend increases, supporting the perception that SO's dividend is both stable and reliable.

Stable Business Model: About 90% of SO’s earnings come from electric and gas utilities that are regulated by the state. This provides steady income, as the company can adjust prices and recover costs through these regulations. This makes it a low-risk investment, ideal for investors looking for stability.

While SO offers an appealing investment profile with its reliable revenue model and strong growth prospects, there are certain risks that may concern investors.

What are the Potential Risks for SO Stock?

Valuation Concerns: SO's P/E ratio of 19.27 is higher than the sub-industry's average of 14.61, signaling that investors may be overestimating its growth. With risks like fluctuating gas prices and costly projects like Plant Vogtle, the current valuation might not be justified. If these challenges affect earnings, the stock price could drop, investors should be cautious.

Energy Transition Delays: President Donald Trump's actions to withdraw from the Paris Agreement and halt certain climate-related initiatives could create uncertainty in the long-term energy transition, which may affect investor confidence in renewable energy companies like SO. The shift in policy direction could delay the broader push toward cleaner energy, impacting SO's strategic goals in the renewable space.

Restricted Growth in Non-Regulated Segment: Southern Power, the company’s non-regulated division, contributes only a small share of total revenues. Although the division provides steady cash flow through long-term contracts, its growth prospects are limited relative to the more profitable regulated utility business.

High Dependence on Regulatory Approvals: SO’s reliance on state regulators for cost recovery makes it highly exposed to policy changes or political pressures. As regulatory environments shift toward stricter emissions targets or consumer affordability concerns, there is a risk that future rate hikes or project approvals could face delays or denials.

Stock Performance Concern:  In the past six months, SO’s share price has gained only 4.2%, slightly ahead of the sector's 2.9%, but the stock has underperformed its sub-industry (5.3%) and peers. Dominion Energy D, ENEL Chile SA ENIC and CenterPoint Energy CNP rose 4.3%, 6.1% and 12.7%, respectively. This underperformance in share price could signal investor concerns and may hurt SO’s valuation moving forward.

Analyzing 6-Month Price Movement

Image Source: Zacks Investment Research

Final Thoughts for SO Stock

SO offers a stable and predictable business model, with around 90% of its earnings coming from state-regulated electric and gas utilities, which provides reliable cash flow. The company also has strong revenue growth potential, a solid dividend track record with 23 consecutive years of increases and is well-positioned to capitalize on the rising demand for data center power.

SO faces challenges such as a high P/E ratio compared with its sub-industry, raising concerns over its valuation. Additionally, SO’s non-regulated segment offers limited growth potential and the company’s heavy reliance on regulatory approvals exposes it to policy changes that could impact earnings and project developments.

Given this mix of strengths and potential challenges, investors should wait for a more opportune entry point instead of adding this Zacks Rank #3 (Hold) stock to their portfolios.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Southern Company (The) (SO) : Free Stock Analysis Report

CenterPoint Energy, Inc. (CNP) : Free Stock Analysis Report

Dominion Energy Inc. (D) : Free Stock Analysis Report

Enel Chile S.A. (ENIC) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research