Here's Why Holding Southern Company Is Justified for Now

Southern Company SO stands as a major player in America’s utility industry, playing a vital role in electricity production, delivery and infrastructure. Serving millions across Georgia, Alabama and Tennessee through its various subsidiaries, the company operates a broad and balanced energy portfolio that spans nuclear, coal, hydropower, solar, wind and cutting-edge battery storage technologies.

With a clear focus on the future of energy, SO is committing significant resources to the expansion of natural gas, renewable energy and forward-thinking innovations like microgrids. These strategic investments reflect its dedication to driving the industry toward a more sustainable and resilient energy framework. Thanks to its well-diversified energy mix and substantial infrastructure, Southern is well-positioned to take a leadership role in the transition to cleaner energy sources.

Approximately 90% of Southern’s profits are generated from regulated electric and gas utilities at the state level, providing a consistent and relatively low-risk revenue stream that appeals to long-term investors. This financial stability, coupled with its extensive operational footprint, reinforces Southern’s influential status in the national utility space.

For shareholders, a key consideration is whether now is the right time to invest further in SO stock or maintain their existing positions. Given the reputation, diversified assets and commitment to innovation, the company remains an attractive option, though it is not without risks. Market fluctuations, regulatory shifts and infrastructure costs are just a few challenges that could impact its short-term valuation. In this context, it is important to assess what is currently driving interest in Southern stock, as well as the risks that could shape investor sentiment going forward.

What’s Driving SO’s Recent Outperformance?

Strong Earnings Growth: Southern reported strong first-quarter 2025 earnings, with adjusted EPS of $1.23, up 20% year over year. Net income (excluding items) rose to $1.4 billion, driven by higher utility revenues and disciplined cost management. The company’s consistent earnings growth, despite macroeconomic uncertainties, highlights its operational resilience. This performance further reinforces confidence in its long-term financial outlook.

Dividend Growth and Stability: The company increased annual dividend by 8 cents per share, marking its 24th consecutive annual hike and 78 years of uninterrupted payouts. This demonstrates Southern’s commitment to shareholder returns and financial discipline. A growing dividend, coupled with a sustainable payout ratio (targeting a low 60% range), makes it attractive for income-focused investors.

Robust Economic Development & Load Growth: Southern’s service territories are experiencing strong economic activity, with more than 50 gigawatt (GW) large-load pipeline (including data centers and industrial projects). Contracted and committed projects (e.g., Hyundai’s Georgia plant) provide visibility into revenue growth. The company’s conservative approach, only banking on a fraction of this pipeline, reduces execution risk.

Regulatory Support & Constructive Frameworks: The company benefits from supportive regulatory environments, especially in Georgia, where recent tariff structures for data centers offer pricing certainty. This well-defined framework reduces regulatory risk and guarantees cost recovery for capital investments. Additionally, upcoming Integrated Resource Plan decisions and Requests for Proposals (RFPs), including plans for 13 GW of new resources, strengthen the company’s growth outlook.

Data Center Momentum: The company’s data center pipeline remains robust (8 GW committed in Georgia alone), with hyperscalers showing sustained interest. Recent tariff frameworks provide clarity for future contracts, ensuring equitable cost allocation. This positions Southern to capitalize on the AI/cloud-driven energy demand surge.

Strong Market Outperformance: Over the past six months, SO has delivered impressive performance, with its share price rising 15.7%. This growth outpaced the broader Utility-Electric Power sub-industry, which gained 13.5%, and the overall Utilities Sector, which returned 13.8%. SO’s outperformance indicates that its fundamental strengths or recent strategic initiatives have contributed to the leading position within the industry.

6-Month Share Price Performance: Southern Company vs. Sector and Sub-industry

What External Factors Could Derail SO’s Growth?

Tariff and Supply-Chain Pressures: Management estimates tariffs could increase costs by 1-3%, but this assumes proactive mitigation (e.g., shifting suppliers to USMCA-compliant vendors). Prolonged trade tensions or new tariffs (e.g., on transformers, solar panels) could exacerbate these pressures. Southern Power’s contracted gas projects may face margin compression if tariffs raise equipment costs without commensurate rate adjustments. The company’s reliance on imported materials for renewable projects (e.g., solar modules) also exposes it to geopolitical risks, such as U.S.-China trade disputes. While contingencies exist, unanticipated spikes in costs could dent earnings.

Execution Risk in Load Pipeline: The more than 50 GW pipeline is impressive, but includes speculative projects and potential double-counting. For example, only 10 GW are currently committed, with the rest subject to permitting, financing or customer decisions. Data center demand, while strong, is cyclical and hyperscalers could delay projects amid economic uncertainty. The company’s disciplined approach (forecasting only a fraction of the pipeline) is prudent, but over-optimism about load growth could lead to stranded assets or underutilized capacity.

Environmental Liabilities: Legacy issues like coal ash cleanup and litigation (e.g., Kemper County) remain overhangs, with more than $100 million in projected 2025 costs. Stricter future EPA regulations (e.g., CCR rule expansions) could force unplanned capex. The company’s coal fleet retirement timeline also faces scrutiny, as delays may conflict with decarbonization goals. While Southern is investing in renewables, its slower transition compared with peers risks reputational and regulatory backlash.

Weather-Dependent Earnings: First-quarter 2025 EPS was positively impacted by colder weather. However, weather-normalized retail sales declined 0.3%. Residential sales fell 1.8% on a weather-adjusted basis, reflecting broader demand softness. Extreme weather events, such as hurricanes and heatwaves, can strain grid reliability and lead to costly repairs, even with regulatory recovery mechanisms in place. Climate change may further intensify these risks, potentially increasing earnings volatility.

Competition From Distributed Energy: The rise of rooftop solar, battery storage and community microgrids could erode Southern’s traditional utility model over time. While the company is investing in renewables (e.g., solar RFPs), its pace lags some peers, risking customer defection or margin compression. Regulatory frameworks may also evolve to favor decentralized generation, challenging the centralized grid’s economics.

Interest Expense Headwinds: Higher interest rates have increased refinancing costs, particularly for parent-level debt. The company’s $2.4 billion junior subordinated notes issuance in 2025 (with 50% equity credit) helps mitigate this, but rising rates could still pressure FFO/debt metrics. Additionally, more than $2 billion in regulatory assets (e.g., unrecovered fuel costs) will take years to roll off, delaying balance sheet improvement. If interest rates remain elevated, future capex financing could become more expensive, squeezing margins.

Final Thoughts on SO Stock

Southern offers compelling reasons for investor interest, including strong first-quarter 2025 earnings growth, a 24th consecutive annual dividend increase and robust economic development across its service territories. The company’s growing data center load, supportive regulatory frameworks and outperformance of utility peers further underscore its long-term potential.

However, Southern faces notable headwinds, such as tariff-related cost pressures, execution risks in its ambitious load pipeline and persistent environmental liabilities. Additionally, weather-dependent earnings, competition from distributed energy resources and rising interest expenses introduce uncertainty to its outlook.

Given this mix of strengths and potential challenges, investors should wait for a more opportune entry point instead of adding stock to their portfolios.

SO’s Zacks Rank and Key Picks

Currently, SO carries a Zacks Rank #3 (Hold).

Investors interested in the utilitysector might look at some better-ranked stocks like National Grid Transco NGG, which sports a Zacks Rank #1 (Strong Buy),  Fortis Inc. FTS and E.ON SE EONGY, each carrying a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

National Grid is worth approximately $69.32 billion. It currently pays a dividend of $4.07 per share, or 5.74% on an annual basis.

National Grid, founded in 1990 and headquartered in London, engages in the transmission and distribution of electricity and gas through various segments, including UK Electricity Transmission and Distribution, New England, New York, National Grid Ventures and Other. These segments provide a range of services such as electricity and gas distribution, high-voltage transmission, LNG importation and property leasing and insurance activities across the United Kingdom and the northeastern United States.

Fortis is worth approximately $23.60 billion. It currently pays a dividend of $1.78 per share, or 3.81% on an annual basis. Fortis is a leading electric and gas utility firm serving customers across Canada, the United States and the Caribbean, with extensive electricity generation, transmission and distribution operations.

Founded in 1885 and headquartered in Saint John's, Canada, the company operates a vast network of power and gas infrastructure, providing energy to thousands of residential, commercial and industrial customers.

E.ON SE is worth approximately $49.33 billion. It currently pays a dividend of 46 cents per share, or 2.41% on an annual basis. E.ON SE is a multinational energy company headquartered in Essen, Germany, operating across Europe and internationally through its Energy Networks, Energy Infrastructure Solutions and Energy Retail segments.

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This article originally published on Zacks Investment Research (zacks.com).

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