AEP Takes Valuation Downgrade (AEP, XLU)

American Electric Power Company (NYSE: AEP) saw a great 2011 and its earnings should hold up incredibly well if Ben Bernanke and friends at the Federal Open Market Committee live up to their outlook that interest rates should remain exceptionally low through the end of 2014 now.  After utilities were top performing sector for the S&P, many investors chasing yields of 4% or 5% are asking themselves if the valuations are either too high or if they are too close to fully value to merit a new investment.  Some analysts are starting to wonder (and act upon) the same concern.

Deutsche Bank downgraded American Electric Power Company (NYSE: AEP) to Hold from Buy this morning.  The price target is $41.00, so investors might hope for a pullback before chasing that 4.50% yield.

Be advised that AEP was part of the 24/7 Wall St. Model Dividend Portfolio.  Actually, it is a part of it and there has been no change.  Our take is that AEP can still hit $44 to $45 in the next 12 to 18 months.  Thomson Reuters has a consensus price target of $42.14 and the 2.4% drop today to $40.27 compares to a 52-week range of $33.09 to $41.98.  Any drop down to $38 to $39 should simply be considered an opportunity for investors who missed out to start accumulating shares for their part of an income portfolio.

AEP accounts for almost 5% of the weighting of the SPDR Select Sector Fund (NYSE: XLU) on last look.

JON C. OGG