Southern Company Earnings: Plenty of Long-Term Growth Opportunities Following Vogtle Completion

We are reaffirming our $68 fair value estimate for Southern SO after the company reported $1.42 per share of operating earnings during the third quarter, up from $1.31 in the same quarter in 2022, primarily because of warmer summer weather. We are reaffirming our narrow moat rating.

Year-to-date earnings are on track to meet our forecast and management’s $3.55-$3.65 EPS guidance range. The third-quarter weather benefit helped offset the first-half earnings drag from a warmer-than-normal winter. Weather is still a $0.09 per share drag through the first three quarters, but that doesn’t have a material impact on our fair value estimate or our outlook for 2024 and beyond.

Southern still plans to bring the Vogtle 4 new nuclear unit online in early 2024. Management raised its share of total estimated project costs by $160 million to $10.8 billion but also estimated only $258 million is left to spend, limiting the risk of any substantial additional cost overruns.

Southern’s stock has been one of the top-performing utilities this year, beating the Morningstar US Utilities Index by 15 percentage points. The stock trades in line with our fair value estimate as of Nov. 2. Southern’s 4% dividend yield is slightly above the sector median, but we expect only 3% annual dividend growth for at least two more years until Southern’s payout ratio falls below 70%.

We continue to forecast 6% long-term weather-normalized annual earnings growth, in line with management’s 5%-7% target, based on an average $8.6 billion annual capital investment during 2023-25, excluding Vogtle. We think that capital investment run rate could increase when management updates its plan in February based on investment opportunities in Georgia and Alabama along with renewable energy projects at Southern Power.

We continue to forecast 2024 weather-normalized earnings in line with management’s $3.95-$4.10 post-Vogtle EPS guidance range.