Here's Why Hold Strategy Makes Sense for Southern Stock Now

Southern Company SO is a leading player in the U.S. utilities sector, handling the generation, transmission and distribution of electricity through its various subsidiaries. The company owns a wide range of power generation assets, including nuclear, coal, hydro, solar, wind and battery storage, serving around 8.9 million electric and gas customers in Georgia, Alabama and Tennessee.With investments in natural gas, renewable energy and solutions like microgrids, SO is working to lead the shift to cleaner energy. The company’s strong position comes from its diverse energy assets and focus on innovation, especially in renewable energy and grid reliability. Around 90% of SO's earnings come from state-regulated electric and gas utilities, which provides stable income and makes it a low-risk investment. Its large scale and infrastructure give Southern Company an important role in the U.S. energy market.For investors watching Southern Company, the question is whether now is the right time to buy or hold. With the company’s solid reputation in the utilities sector and impressive portfolio of energy assets, it is no surprise that many are curious about the future performance of SO stock. While SO presents several growth opportunities, it also faces challenges that could impact the company’s valuation in the near term. Let us dive into what is currently helping Southern Company stock and what could raise concerns for potential investors.What is Favoring SO Stock?Digital Transformation and Grid Modernization: SO is investing in smart grid technologies, digital infrastructure and cybersecurity to enhance operational efficiency and customer reliability. The company’s fiber optic subsidiary, Southern Telecom, supports data-intensive businesses, aligning with the growing demand for digital services. By integrating AI-driven analytics, automated grid management and resilience improvements, SO is positioning itself as a technology-driven utility leader in the evolving energy landscape.Strong Earnings Growth and Predictable Returns: SO achieved adjusted earnings of $4.05 per share for 2024, representing 11% year-over-year growth. The company continues to maintain a steady earnings trajectory, targeting 5%-7% annual EPS growth. Its vertically integrated utility model, combined with a constructive regulatory environment, supports predictable earnings, making SO an attractive investment for those seeking stability and steady returns.  The Zacks Consensus Estimate for its earnings for 2025 is pegged at $4.59 per share, suggesting a year-over-year improvement of 6.42%.Image Source: Zacks Investment ResearchFind the latest EPS estimates and surprises on Zacks Earnings Calendar.Expanding Customer Base and Strong Economic Growth: SO’s service territories are experiencing significant economic expansion, with more than 150 companies announcing new or expanded operations in 2024. The company added 57,000 new residential electric customers and 26,000 new natural gas customers, highlighting robust demand. Additionally, the rapid expansion of data centers in the Southeast is driving electricity demand growth, with projections of 50,000 MW of incremental load by the mid-2030s.Attractive Dividend Profile and Stability: Southern Company has a long history of paying and increasing dividends, with consecutive annual increases for 23 years and uninterrupted payments for 77 years. Management remains committed to maintaining a strong dividend profile, aiming for modest increases while lowering the payout ratio to the low-to-mid 60% range. This makes SO a reliable choice for income-focused investors.Regulatory Support and Rate Base Growth: SO benefits from a supportive regulatory environment, which enables steady rate base growth. The company’s long-term capital investment plan includes $63 billion in planned investments through 2029, primarily in state-regulated utilities. This investment plan, coupled with favorable rate case outcomes, ensures continued earnings and cash flow stability.While SO has strong growth prospects, such as its digital transformation and expanding customer base, investors should be cautious of potential risks. Let’s discuss.What are the Potential Risks for SO Stock?Exposure to Natural Gas Price Volatility: While natural gas is a key revenue driver for Southern Company, fluctuations in gas prices can impact margins and earnings stability. Although most contracts allow SO to pass through fuel costs to customers, sudden price spikes could lead to higher regulatory scrutiny. Additionally, the increasing push for electrification and potential policy restrictions on natural gas infrastructure pose long-term risks to the company’s natural gas distribution and pipeline investments.Rising Operational and Regulatory Costs: Non-fuel operations and maintenance expenses, as well as depreciation and amortization costs, increased in 2024, negatively impacting margins. Additionally, the company faces regulatory risks related to environmental compliance and cost recovery for major infrastructure projects. Any unfavorable regulatory rulings or disallowances could further pressure earnings.Potential Overreliance on Data Center Growth: While Southern Company is betting heavily on data center-driven electricity demand, this segment is highly cyclical and sensitive to economic downturns and regulatory changes. The company recently introduced stricter credit and collateral requirements for new large-load customers, which could result in some speculative projects falling through. If actual demand growth does not meet projections, future rate base growth and revenue forecasts may be impacted.Cost Overruns and Execution Risks on Capital Projects: Southern Company has a history of project cost overruns, most notably with Plant Vogtle Units 3 & 4, which faced significant delays and budget overruns. While the company is investing heavily in grid modernization and renewables, large-scale projects carry inherent risks, including regulatory approvals, construction delays and cost escalations. If new projects fail to generate expected returns, the company’s earnings and cash flow could be impacted.Stock Performance is a Concern: In the past six months, SO share price has risen only 0.8%, ahead of its sub-industry's fall of 0.9%. However, the stock has underperformed compared to its peers in the Electric Power sub-industry, such as ENEL Chile SA ENIC, CenterPoint Energy CNP and Ameren AEE, which rose 30.3%, 25.3% and 16.6%, respectively. This underperformance in the share price could signal investor concerns and may hurt SO’s valuation moving forward.Six-Month Price Performance ComparisonImage Source: Zacks Investment Research Final Thoughts on SO StockSO benefits from strong earnings growth, a growing customer base and significant investments in digital transformation and grid modernization, positioning itself as a technology-driven leader in the utility sector. Its steady earnings, attractive dividend profile and favorable regulatory environment enhance its appeal for income-focused investors.However, risks include exposure to volatile natural gas prices, rising operational costs and the potential overreliance on cyclical data center growth. Additionally, challenges related to project cost overruns and stock price underperformance relative to peers may raise investor concerns moving forward.Given this mix of strengths and potential challenges, investors should wait for a more opportune entry point instead of adding this Zacks Rank #3 (Hold) stock to their portfolios. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.Zacks' Research Chief Names "Stock Most Likely to Double"Our team of experts has just released the 5 stocks with the greatest probability of gaining +100% or more in the coming months. Of those 5, Director of Research Sheraz Mian highlights the one stock set to climb highest.This top pick is among the most innovative financial firms. With a fast-growing customer base (already 50+ million) and a diverse set of cutting edge solutions, this stock is poised for big gains. Of course, all our elite picks aren’t winners but this one could far surpass earlier Zacks’ Stocks Set to Double like Nano-X Imaging which shot up +129.6% in little more than 9 months.Free: See Our Top Stock And 4 Runners UpWant the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report Ameren Corporation (AEE): Free Stock Analysis Report Southern Company (The) (SO): Free Stock Analysis Report CenterPoint Energy, Inc. (CNP): Free Stock Analysis Report Enel Chile S.A. (ENIC): Free Stock Analysis ReportThis article originally published on Zacks Investment Research (zacks.com).Zacks Investment ResearchWeiter zum vollständigen Artikel bei Zacks Weiter zum vollständigen Artikel bei Zacks