The Southern Company's (NYSE:SO) robust recent earnings didn't do much to move the stock. We believe that shareholders have noticed some concerning factors beyond the statutory profit numbers.
One essential aspect of assessing earnings quality is to look at how much a company is diluting shareholders. Southern expanded the number of shares on issue by 5.7% over the last year. Therefore, each share now receives a smaller portion of profit. Per share metrics like EPS help us understand how much actual shareholders are benefitting from the company's profits, while the net income level gives us a better view of the company's absolute size. You can see a chart of Southern's EPS by clicking here.
A Look At The Impact Of Southern's Dilution On Its Earnings Per Share (EPS)
As you can see above, Southern has been growing its net income over the last few years, with an annualized gain of 65% over three years. And in the last year the company managed to bump profit up by 12%. On the other hand, earnings per share are only up 8.8% in that time. So you can see that the dilution has had a bit of an impact on shareholders.
Changes in the share price do tend to reflect changes in earnings per share, in the long run. So it will certainly be a positive for shareholders if Southern can grow EPS persistently. However, if its profit increases while its earnings per share stay flat (or even fall) then shareholders might not see much benefit. For the ordinary retail shareholder, EPS is a great measure to check your hypothetical "share" of the company's profit.
That might leave you wondering what analysts are forecasting in terms of future profitability. Luckily, you can click here to see an interactive graph depicting future profitability, based on their estimates.
Our Take On Southern's Profit Performance
Southern shareholders should keep in mind how many new shares it is issuing, because, dilution clearly has the power to severely impact shareholder returns. Therefore, it seems possible to us that Southern's true underlying earnings power is actually less than its statutory profit. But at least holders can take some solace from the 59% per annum growth in EPS for the last three. The goal of this article has been to assess how well we can rely on the statutory earnings to reflect the company's potential, but there is plenty more to consider. In light of this, if you'd like to do more analysis on the company, it's vital to be informed of the risks involved. For instance, we've identified 2 warning signs for Southern (1 is significant) you should be familiar with.
Today we've zoomed in on a single data point to better understand the nature of Southern's profit. But there are plenty of other ways to inform your opinion of a company. Some people consider a high return on equity to be a good sign of a quality business. While it might take a little research on your behalf, you may find this free collection of companies boasting high return on equity, or this list of stocks with significant insider holdings to be useful.
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