Southern Co. vs. ConEd: Which High-Yield Utility Stock Wins?

Utility stocks serve a valuable purpose for income investors. The highest-quality utilities have long histories of steady, uninterrupted dividends. Over the years, utility stocks became known as widow-and-orphan investments because of their reliable dividend payouts. Today, The Southern Company and Consolidated Edison, Inc. are among the most highly regarded dividend payers in the utility sector. Southern recently increased its dividend for the 18th consecutive year. It qualifies as a Dividend Achiever, a group of 264 stocks with at least 10 years of annual dividend raises. Meanwhile, ConEd is a Dividend Aristocrat, as it has increased its dividend for over 40 years in a row. Southern and Consolidated Edison have nearly identical business models, but also have significant differences, particularly when it comes to their dividends. Business Comparison and Recent Events Southern Company is an electric and gas utility with 46,000 megawatts of electric generating capacity, serving 9 million customers in the United States. Southern generates annual revenue above $23 billion, and the stock has a market capitalization above $54 billion, making it one of the largest publicly-traded U.S. utilities. Consolidated Edison is about half the size of Southern Company. ConEd delivers electricity, natural gas, and steam to over 4 million customers in New York. It has annual revenue of $12 billion, and a market capitalization exceeding $27 billion. Despite their similar businesses, ConEd has significantly outperformed its industry peer Southern. Over the past five years, ConEd generated annualized total returns of 12.4% per year, compared with 7.8% per year for Southern. This is because of their respective fundamentals. Due to its poor execution and its acquisition of AGL Resources for $12 billion in 2016, Southern has almost doubled its net debt in the last five years. In addition, it has a heavy debt maturity schedule, with $10.2 billion of its debt maturing in the next three years. This is especially problematic now that interest rates have risen over the past year. Furthermore, Southern continues to be dogged by cost over-runs related to the construction of its Vogtle nuclear units. In 2018, Southern booked a $1.1 billion estimated loss on plants under construction. As a result, Southern had a fairly weak performance last year. Even excluding one-time items like the construction-related loss, Southern reported adjusted earnings per share of $3.07 for 2018, an increase of just 1.6% from 2017. Favorable rate outcomes were heavily offset by a 9% increase in interest expense and a 3% increase in the share count. The total cost of the Vogtle project is now $28 billion, more than double the initial estimate. Part of the bloated costs pertains to the bankruptcy of contractor Westinghouse Electric. Still, estimated completion is five years later than projected. The two units will not be in full operation until the back half of 2022. Therefore, investors can not count on immediate relief from this major overhang. Evidence of this is reflected in Southern's weak 2019 guidance. The company expects adjusted EPS in a range of $2.98 and $3.10. At the midpoint of guidance ($3.04) adjusted EPS is projected to decline 1% in 2019. ConEd's stronger fundamentals explain its outperformance compared to Southern over the past several years. ConEd reported strong earnings for 2018. Adjusted EPS of $4.33 increased 5% from 2017. Revenue grew 2.5% to $12.3 billion for the year. Growth was primarily due to planned rate increases. ConEd received approval to increase rates in 2020, with the average New York City customer seeing their bill increase by 4.9%. This will help ConEd stay on track for continued growth. Tax reform passed at the end of last year will save the utility nearly $350 million per year going forward. Consolidated Edison expects adjusted earnings per share in the range of $4.25-$4.45 for 2019. At the midpoint ($4.35), ConEd's adjusted EPS is expected to rise by 0.5%. This is a modest growth rate, but even low growth always beats decline. Southern and ConEd both have the tailwind of rate increases to fuel revenue growth. But Southern's ongoing trouble at Vogtle means its growth will be uniquely suppressed within the utility sector. ConEd has no such problem, which means investors can reasonably expect it to continue growing adjusted EPS in the low-single digits each year moving forward. Their diverging earnings growth also impacts their dividend growth, a key consideration for investing in the utility sector. Dividend Comparison Southern recently increased its dividend by 3.3%. Its forward dividend payout totals $2.48 per share, equaling a 4.8% dividend yield based on the recent share price. Southern has increased its dividend for 18 consecutive years, an impressive record, but not quite matching ConEd's dividend history. ConEd is a Dividend Aristocrat and has increased its payout for 45 consecutive years, including a 3.5% hike on January 17. ConEd has a current yield of 3.5%. The trade-off for investors is to choose between yield and growth. Southern has a significantly higher yield than ConEd -- 4.8% to 3.5%. This is a meaningful difference, as Southern pays approximately 37% more dividend income than ConEd. Put differently, an investor purchasing $10,000 worth of Southern shares will receive $480 in dividend income over the next year. Meanwhile, an investor purchasing ConEd will earn $350 in annual dividends. However, ConEd is the better stock for dividend growth. Its recent dividend hike was slightly larger than Southern's, and ConEd has a much longer history of annual dividend increases. ConEd could continue to be the better pick for dividend growth in the years ahead. Due to Southern's aforementioned construction losses, the company has a high dividend payout ratio (81%) expected for 2019. By contrast, ConEd is expected to distribute 68% of its 2019 adjusted EPS in the form of dividends. A significantly lower payout ratio leaves greater room for dividend growth. Investor Takeaways Investors looking for exposure to the utility sector have many stocks to choose from. Southern and ConEd are both excellent choices because of their high yields. Since electricity and gas are so important, it is highly unlikely these two companies will stop paying dividends anytime soon. Utilities will never be looked at for growth, but from the perspective of consistent dividend income, they are hard to beat. Dividends are a central point of focus for investors considering utility stocks. As a result, it is only natural to focus on dividends when picking between Southern and ConEd. Southern has a significantly higher yield than ConEd, making it the better pick for investors looking purely for higher income right now. However, due to its status as a Dividend Aristocrat, ConEd is the better pick for investors who are more concerned with growth.

Southern Co. vs. ConEd: Which High-Yield Utility Stock Wins?

Southern Company and Consolidated Edison are among the most highly regarded dividend payers in the utility sector.

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