APRIL, 17, 2020
utilities are running negatively both YTD and over the past six fugly months. We track nine. Is that still investing? Is it even “capital preservation,” when your stock’s going down? Markets go up and also come down, like boulders tumbling.
Somebody somewhere claimed that the vast majority of any stock’s annual move occurs in only 14 days. People say a lot of things, but this one’s true.Utilities can mean having something sturdy that pays, regardless. Here’s another. Utils are not created equal.
Jim Cramer routinely provides more investable insight than anyone out there. Cramer likes AEP. We’ve learned more from Jim than anyone else, yet things change and perspectives vary. How’s AEP now? We took a look into AEP to see if we were dealing with a “DIM BULB or NIGHT LIGHT? American Electric Power.”
utility stocks a good buy now? Yes. One could say, and we do, that a utility play is almost essential now. Many seem convinced a recession lies directly ahead. A low Beta and a consistent payout are good things. AEP’s current 0.75 Beta and 3.33% dividend are just that, good things. We all recall that a Beta of 1 says the stock behaves with the same volatility as the market. But then seasoned investors will tell you volatility has nothing to do with long-term buys.
Over the past one month all nine utils we track are positive, with the Detroit based train wreck DTE Energy up 22.8% on the close Friday. Over three months DTE is down just as much–20.9%, and -14.5% over a full year. That’s with the dividend. Over that same one month Allentown-based PPL Corp. comes in positively last but positive at 2.7%. It’s double-digit negative over it’s one and three year runs, again with the dividend. So where’s the defense?
American Electric Power is a true powerhouse. It’s growing it’s customer base, receiving regulatory support for increases in the rates charged for that power, and for transmission fees, and it’s continuing to build a bigger future through on-going and robust cap-ex spending, and financing that growth at affordable financing rates. What’s not to love? AEP also hosts a large and slowed industrial customer base.
operates in eleven states including Kentucky, West Virginia, Tennessee, Michigan, Oklahoma, and Texas. A large footprint gives and takes away. It’s complicated. Yet its; bets are spread, as are its’ operations. Anyone who tells you utilities are simple operations has never looked below the waterline.
A utility? Simple. Utilities generate power, often in 3 or 6 ways–coal/ lignite, nat gas, nuclear, hydro, solar, wind, transmit that juice, over long distances and through multiple variously regulated/governed jurisdictions, distribute, to Fa King millions, while stepping up then down that juice along the way, deliver, repair, bill, and inform, residential, commercial, and industrial customers, in all weather year-round, contract pricing through regulators and the courts, for years, negotiating within unique political scenarios in each area of operation, often governed by varying laws, the pricing itself structured by complex and complicated contracts which include scads of legal “riders,” each with it’s own time elements and contingencies, hedge, buy, sell, and swap, energy amid moving markets, while maintaining all the infrastructure, equipment, facilities, and HR, managing their business financially, and attempting to please shareholders.
And how’s that going? AEP has 17 analysts covering. It now ranks 4 “Buy,” 4 “Outperform,” and 7 “Hold.” Is that good? Early Wednesday Morgan Stanley cut its’ price target from $103 to $100. Before yawning, that three buck cut equals a 2.91% PT cut. Seen another way the cut equals 89.5% of the dividend return. Do you want to own a utility with virtually zero dividend? Meanwhile, Morningstar pegs AEP’s Fair Value Estimate at $83. That’s $3.38 below it’s current $86.38, as of close Friday.
Morgan Stanley’s new price target for AEP suggests a 15.7% move on an “Over-weight” rating. Add the current 3.33 dividend and you have a semi-attractive package, if it happens. Morningstar says it’s done at $83 and passed done at $86.38, and enjoy the dividend and the “sleep at night” kicker Beta.
the catch? Economic slowdown. Regulated utilities live in a margin, between financing costs and regulated rates. The majority of AEP’s business is regulated. This is a sweet spot, and not. Cheap money in a super low-rate environment allows cheap financing for capital expenditures.
Yet, the economic chaos of Covid is costing even utilities in terms of lowered power consumption. Think lower industrial and commercial usage. Volume matters more when prices are capped. AEP lives in that precise give-and-take box, and that’s far from great. Yet how well was AEP’s share price performing prior to this pandemic?
Over the past twelve months you’d be 4.3% better off for sitting on AEP–that includes the dividend. Think a CD. Over three years you’d have collected 37.5%, or 12.5%. Not bad as defense. Over five you’d be 78.8% up, or 15.7%. Recall that historically, a 7% appreciation is considered good, but hardly inspiring. But again, there’s that “sleep at night” thing.
American Electric Power Co. In. AEP: NYSE
too much is a rookie mistake. We’ve done it over and over. Why? Because a significant element of becoming a seasoned investor is learning value, and developing the ability to pass when prices are too high. If you can’t walk away, you’re gonna get screwed. AEP scores well on both long-term performance and valuation, as we can see below.
American Electric Power Co. In. AEP: NYSE
accumulation of automatically reinvested dividends accounts for 40% or all long-term stock returns. Utilities do that well, and unlike CDs usually offer some price appreciation. When recession is likely, and it seems so, a utility is a crucial part of a smart portfolio. The price volatility is offering a way in. If intrigued, wait for it. Morningstar calls AEP fully valued now.
AEP’s long-term track record is strong. Their valuation compares favorably to peers. And unlike Dominion’s 222.2% payout ratio, AEP’s 61.3% is healthy, and lower than Con Ed’s 72%. Southern’s is even lower at 54%, with a higher 4.48% dividend. We like, and own, both SO and AEP. As always, good luck and good investing.