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Summary AEP could sell competitive energy operations if weakness continues to persist in the segment’s performance despite long-term pricing agreements. AEP’s capital expenditures will fuel rate based and bottom-line growth in coming years. Stock’s dividend yield of 3.6% is backed by its cash flows. American Electric Power (NYSE: AEP ) has remained an admired investment option for dividend-seeking investors due to its high dividend yield, which is backed by its cash flows. Also, the company is expected to experience healthy earnings growth in the future, driven by capital expenditure that AEP is making to expand its transmission operations. The company expects to experience regulated rate base growth of 7.5% on average until 2017. Separately, AEP has been considering several options to address challenges faced by its competitive energy operations, including the sale of competitive assets, which will positively affect its bottom-line numbers growth. Earnings growth due to the expansion of regulated energy operations will improve bottom-line growth, and hence strengthen cash flows, which will support dividend growth for AEP in the coming years. Therefore, I believe AEP will deliver a healthy financial performance in 2015, which will positively affect the stock price. Healthy Growth Outlook AEP has made the correct strategic decision to address challenges faced by the company in the competitive energy segment; the company’s competitive energy operations have been adversely affected due to low and volatile forward power prices. AEP is looking for a reliable long-term price agreement to stabilize revenues for the segment. And if the long term pricing agreement does not help AEP address challenges faced by the segment, I believe the company will choose to sell its competitive energy assets. The company recently announced that Goldman Sachs will assist AEP in considering options for its competitive energy operations. AEP’s director of external communication, McHenry said, “We haven’t made a decision about whether or not we’re going to sell them, we’re looking at a variety of options.” Duke Energy (NYSE: DUK ) and PPL Corp. (NYSE: PPL ) are among the leading U.S. utility companies that have sold their competitive energy assets due to the ongoing challenges. Along with its efforts to improve competitive energy operations, AEP has been making capital expenditures to grow it regulated operations, which will improve its top and bottom-line growths in the future. The following table shows the capital expenditures that AEP expects to incur from 2015-2017. 2015 2016 2017 Capital Expenditure ($ -billions) $4.4 billion $3.8 billion $3.9 billion Source: Yahoo Finance Also, the company’s regulated rate base growth is expected to increase at an average rate of 7.5% until 2017, due to the capital expenditures it has been making. The increase in regulated operations will also positively affect the stock price. The following chart shows the rate base growth for AEP from 2013-2017. Source: Company Reports Also, the company has been focusing on reducing its costs. AEP has been working to manage and reduce its operational and maintenance costs, which will help offset the weak results of competitive energy operations and support its long-term bottom-line growth. EPS growth for the company is expected to remain in a range of 4%-6% in the long term, as shown below in the chart. Also, the company is expecting its operating earnings for 2014 to in a range of $3.40-$3.50 per share. Source: Company Reports Healthy Dividends The company has been sharing its success with shareholders through dividends. The company offers a dividend yield of 3.60%, which is backed by its cash flows. Also, the company has consistently increased dividends at an average rate of 4% from 2005-2014. The following chart shows the dividend increases for AEP over the years. Source: Company Reports The following table shows the dividend payout ratio and dividend coverage for AEP from 2012-2014 (Dividend coverage = Operating Cash Flows/Dividends). 2012 2013 2014 Dividend Payout Ratio 60% 60% 55% Dividend Coverage 4.1x 4.5x 4x Source: Calculations and Companies Reports As the company has been making efforts to improve its operations through increasing regulated energy operations, its cash flows will be positively affected, which will help AEP increase its dividends at a healthy pace in the coming years. Due to its safe and healthy dividends, the stock remains a good investment option for dividend-seeking investors. Conclusion As competitive energy operations remain weak, AEP has been taking the correct strategic decisions to improve its performance. There is a possibility that AEP might choose to sell its competitive energy operations, if the weakness continues to persistent in the segment’s performance despite long-term pricing agreements. The capital expenditures that AEP is making will fuel its rate base and bottom-line growth in the coming years. And the stock’s dividend yield of 3.6%, backed by its cash flows, makes it a good investment option for dividend-seeking investors. Due to the aforementioned factors, I am bullish on AEP. Scalper1 News
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