Investors have long adored power generation and utility companies for their impressive dividends. Southern Company (NYSE: SO) is a great example. The company has paid a dividend for 277 consecutive quarters, which dates all the way back to 1948! The annual payout today represents a yield of over 4.6%. That's tough to beat, but utility holding company CenterPoint Energy (NYSE: CNP) gives its much larger peer a run for the money, paying out a dividend yield of over 4%.
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Both pay hefty dividends. Both have doubled down on growth opportunities to position themselves to create shareholder value for years to come. Both will release full-year 2016 financial results before the end of the month. But if investors had to choose just one, which stock would be the better buy?
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The most obvious difference between the two companies is size. Southern Company is worth over $47 billion, while CenterPoint Energy is worth $11 billion. That's because the former has more significant and expansive operations, including a power generation portfolio with a total annual capacity of 44,000 megawatts. That is further broken down into 37,800 MW of capacity distributed by its traditional electric utility subsidiaries in regulated markets, 8,600 MW of natural gas generation sold in competitive contracts, and another 1,950 MW sold through long-term competitive contracts.
In 2015 Southern Company generated 92% of its revenue in regulated markets with the balance from long-term contracts, but management plans to diversify its revenue streams in the near future. By 2021 the company wants regulated electric and gas utilities to contribute just 78% of all revenue, long-term contracts to double to 17%, and the remaining 5% to be derived from other growth opportunities, including distributed power and energy storage.
CenterPoint Energy may only be worth one-quarter of its peer, but it certainly holds its own. It provides residential electric utilities to 2.4 million customers around Houston, Texas and distributes natural gas to 3.4 million residential customers in six states -- both considered regulated markets. It also serves about 30,000 commercial and industrial customers in competitive markets in 26 states. And, not wanting to be left out of America's natural gas boom, the company also owns 55.4% of Enable Midstream Partners LP as part of its midstream strategy.
The midstream investment alone represents $4 billion of CenterPoint Energy's current market cap. A doubling of Enable Midstream Partners LP's stock price last year played a significant role in the parent company's impressive 2016 campaign, which allowed it to leapfrog the five-year total returns of Southern Company.
While CenterPoint Energy has the edge in total returns recently, how do the two compare in various valuation metrics? Consider several insightful numbers in the head-to-head matchup:
Source: Yahoo! Finance.
It's worth noting that CenterPoint Energy expects full-year 2016 EPS to fall in the range of $1.16 to $1.20, and for full-year 2017 earnings to come in at $1.25 to $1.33 per share. In fact, both companies have set a goal to grow EPS at 5% for the next few years.
Aside from that, Southern Company has a slight advantage over CenterPoint Energy in terms of its premium to book value and the earnings power of each share. The reverse is true for when comparing enterprise value to EBITDA, a better metric to use since the former has negative earnings per share in the prior 12 months. But since these comparisons don't show a clear cut winner, I think this battle is decided by each company's trajectory.
Southern Company is a earnings powerhouse. Revenue, operating income, and EPS have grown every year from 2013 to 2015, a trend that is likely to continue for all three metrics once full-year 2016 results are announced. It recently acquired PowerSecure, which generates revenue from businesses more aligned with the power industry's future: distributed generation, energy storage, energy efficiency solutions, and utility infrastructure services such as cyber security. Plus, it has been gobbling up wind and solar assets at an accelerated rate in the last year, too.
CenterPoint Energy isn't on a bad trajectory, but the last two years prove that it's a little too dependent on its midstream investments. The company reported EPS of negative $1.61 in 2015 thanks to a giant non-cash equity loss of $1.6 billion for its midstream investments. It's stock price recovered last year along with that of Enable Midstream Partners LP, but EPS was still negatively impacted by its investment for the first half of 2016. Simply put, the company is too small to insulate itself from the risks posed by its midstream businesses when things get rough.
In this case, bigger is better
The better stock to buy in this matchup has to be Southern Company. While it has lagged CenterPoint Energy in the last five years in total returns, it has also provided less volatility for investors -- a valuable asset for income investors. Additionally, management's strategy to diversify the business into higher growth, "less boring", "future proof" opportunities should keep the party going for shareholders for the foreseeable future.
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