American Electric Power Co., Inc. (NYSE: AEP) refuses to falter in the current market despite many headwinds of uncertainty. This is a very defensive play that has very little to do with the woes of Europe and has no direct dependence on the growth of Asia. This is not technically the highest yield of all domestic electric utilities, but the company has a history of remaining very shareholder friendly and is very active in lobbying against issues that would hurt the company and the utility sector in general. The stock is now a component of our new 24/7 Wall St. 2012 Model Dividend Portfolio.
The dividend yield is roughly 4.7% and it pays out close to 60% of its expected income as dividends. It also has a double-digit return on equity and it trades at just under 12.5-times expected 2012 earnings estimates. Shares are trading around $39.75 and its consensus price target is about $41.10. Our own internal target is actually $44.00 on the stock and that means any pullbacks are buying opportunities. The dividend was just raised in November and we would not look for another dividend hike until late in 2012.
The giant utility has a new CEO and the stock is close to a 52-week high, but it also would have to rally another 25% or so before challenging its multiyear highs around $50.00. The utility sector is often invested in via the Utilities Select Sector SPDR (NYSE: XLU), of which AEP is a key component, but AEP is cheaper than many of the components inside the ETF. This sector is also one which many former CD-investors (certificates of deposit) are still buying into for high dividend yields.
Depending on pricing on any given market trading day, an alternative currently would be NextEra Energy, Inc. (NYSE: NEE) with a lower yield but with a dividend that should rise in the first quarter of 2012. PPL Corporation (NYSE: PPL) is another alternative with very close to many of the same financial characteristics as AEP.
AEP and other utilities will benefit from the low interest rate climate that Ben Bernanke has promised will continue through at least mid-2013. The company serves more than 5 million power customers and its geographic footprint spans 11 states. Finally, AEP has been decreasing its coal mix, and that is on the path to drop to under half of its power generation fleet share in the coming years.
Two issues to consider are that AEP is fighting many proposed regulations that would increase the costs for it and its rivals. AEP may also choose to use its financial strength to make selective acquisitions here and there.
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JON C. OGG
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