Being invested in a utility was great for investors during the time when it was assured that interest rates were going to remain low for a very long time. Ahead of the coming rate hike cycle, things have become more realistic in valuation in the utility sector. After Southern Co. (NYSE: SO) announced an acquisition of AGL Resources Inc. (NYSE: GAS) late in August, the stock has been kept down at muted levels.
Now we have a report from independent research firm Argus showing that Southern is now extremely attractive to new and existing investors. This matters because Southern has a much better dividend yield than many of its peers.
Argus reiterated its Buy rating, and still believes that its price target of $50.00 is fair. The AGL Resources transaction is valued at $12 billion, including $8 billion in equity. Southern is to pay $66 per share in cash to AGL shareholders, and that 36% deal premium is still viewed as a positive for Southern.
Why this is viewed so well is that Southern expects the transaction to accelerate the future earnings growth by 4% to 5% from a projected 3% to 4% range if it was just to remain a standalone entity. This may not sound like much, but this goes back to earnings growth and dividends, and it hinges on the notion that Southern expects the deal to be accretive to earnings in the first full year after the closing.
Another benefit here is that this will make Southern the second-largest utility company in the United States. It will also have a projected combined regulated rate base of $50 billion from a combined pool of 9 million customers.