Shares of this utility were recently upgraded by B of A Securities, to ‘Buy.’ The shares have a current annual dividend yield of 3.33%, paid quarterly.
American Electric Power Company, Inc. (AEP)
From Argus Weekly Staff Report
We are reiterating our BUY rating on Focus List selection American Electric Power Co. Inc. with a price target of $102. American Electric Power recently reported second-quarter results that exceeded analyst’s expectations. Second-quarter non-GAAP operating earnings of $1.18 per share was solidly up from $1.08 per share in 2Q20, and beat the consensus estimate of $1.14.We expect the companies vertically integrated utilities segment to benefit if American companies continue to embrace a ‘hybrid model’ in which employees split work time between the home and the office.
The company is well positioned to drive future earnings growth through investments in its regulated businesses, with planned transmission investments funded through equity and debt offerings. AEP is also benefiting from recently implemented cost-reduction programs, which, along with favorable rate case decisions, should contribute to stable earnings growth over the next few years. We also like the company’s consistent record of dividend growth, with a 5.7% compound annual increase over the last five years. The current yield is above the peer average of 3.0%.
We also like AEP over the long term, as the company ranks among the nation’s largest generators of electricity, with substantial exposure to states with strong population growth, like Texas.
As the company scales back its nonregulated business, earnings and dividend growth should become more predictable. The company will also be able to use proceeds from the sale of nonregulated assets to strengthen its regulated business and expand its generation of renewable energy.
Management has projected capital spending of $37.0 billion through 2025, with substantially all of it earmarked for regulated businesses or contracted renewables.
Turning to our estimates, we are maintaining our 2021 adjusted EPS estimate of $4.74. We are also maintaining our 2022 estimate of $5.05. Our long-term earnings growth rate estimate is 6%.
We think that AEP shares remain attractively valued at current prices near $89, above the midpoint of the 52-week range of $75-$94. The shares trade at 18.8-times our 2021 EPS estimate, below the midpoint of the five-year historical range of 17.0-21.3 and below the peer average of 20.5. AEP also trades at a price/book multiple of 2.1, below the peer average of 2.3.
We view AEP as an attractive holding for investors seeking regular dividend payments as well as the potential for moderate capital appreciation. Our target price is $102.
Jim Kelleher, CFA, Argus Weekly Staff Report, argusresearch.com, 212-425-7500, August 5, 2021