Utilities had an up-and-down year in 2016, but industry leader Southern Company (NYSE: SO) managed to give its investors gains of about 10% over the course of the year. Thanks to a combination of stock price increases and lucrative dividends, Southern took advantage of better market conditions than most had expected to see. Yet with some changes coming both in the industry and in the markets, investors aren't sure whether Southern's success will continue. Let's take a closer look at how Southern Company stock did in 2016 and whether it can keep growing in the future.
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Image source: Southern Company.
Stats on Southern Company
Data source: Yahoo! Finance.
What helped Southern Company stock rise in 2016?
Southern Company investors came into 2016 worried about the potential direction of interest rates. At the time, the Federal Reserve had just boosted short-term rates for the first time in years, and most experts expected further increases later in the year. Because of the relatively modest growth prospects that big utilities like Southern have, utility stocks tend to be closely tied to the bond market.
As it turned out, though, further interest rate increases never happened. Bonds eventually fell to even lower yields than they had started the year, and by the middle of 2016, Southern stock had posted impressive gains of nearly 20%. Those favorable trends reversed themselves somewhat later in the year, but shareholders still got decent total returns.
From a fundamental perspective, Southern saw ups and downs during the year. February's quarterly results showed a substantial drop in revenue that in large part was due to warmer weather, but adjusted net income gains were still large. Gains in the overall U.S. economy have given Southern's market in the southeastern part of the nation a disproportionately large bump in economic growth, and Southern has done its best to take advantage of the resulting opportunities. First-quarter results in late April continued to give investors confidence even though further revenue gains helped limit the rise in adjusted net income to just 3.5%.
By the second quarter, Southern was starting to gain ground again. Revenue edged upward by 3%, and adjusted earnings climbed at a modest 4% rate. The utility said that it would dramatically boost investment in new projects and acquisitions, seeking to grow more quickly to take advantage of the favorable industry climate. In particular, a key joint venture with Kinder Morgan (NYSE: KMI) gave Southern a 50% interest in the Southern Natural Gas pipeline system. October's third-quarter results showed much larger gains, including a 16% rise in operating revenue and a nearly 20% jump in net income.
Southern Company deals with future risks
That said, Southern Company's slide toward the end of the year reflected a couple of new trends. First, the specter of higher rates came to pass in December, with a rate hike that the Federal Reserve again predicted would be the first of several to come in 2017. Bond-market investors responded by sending long-term interest rates by nearly a full percentage point, and that in turn put pressure on Southern and other utility companies.
Moreover, the changing political environment made Southern's prospects less certain. On one hand, an emphasis from the Trump administration on decreasing regulation could help the utility industry, especially when it comes to decisions to shift from coal to natural gas and other fuels. Yet energy prices have already started to rise, and that will result in higher costs for Southern to get the fuel it needs to power its plants. Similarly, favorable attitudes from the president-elect on nuclear power could be a positive for Southern's nuclear plants, but it won't necessarily change the market dynamics in a way that will make them more profitable. That makes initiatives like Southern's PRISM sodium-cooled fast reactor design, which it expects to collaborate on with General Electric (NYSE: GE), somewhat of a long-term gamble for the utility.
Southern has done well to produce a solid positive return in 2016. Based on current conditions, 2017 could be more challenging for the stock, and investors will have to keep a close eye on Southern to make sure that it makes the most of its opportunities while avoiding the missteps that have led other utilities away from share-price gains in the past.
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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool owns shares of General Electric. The Motley Fool has a disclosure policy.