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Strong Business Fundamentals Yet Again Earn American Electric A Power Bullish Thesis

Summary AEP’s regular transmission business investments will help it expand its rate base. The company is likely to sell competitive assets, which will support capital investment plan. AEP’s on-track cost saving efforts will improve its profit margins. American Electric Power (NYSE: AEP ) has been taking the right measures to address industry challenges. The company’s growth efforts will portend well for its future financial performance. AEP’s hefty growth investments to expand and strengthen its transmission business will positively affect its ROE and allow the company to increase its regulated rate base. Also, rate hikes will better the company’s cash flows, top-line and earnings growth in the years ahead. Moreover, recent rate case approvals at Kentucky and West Virginia will positively affect AEP’s future earnings growth. Given the strong growth potential, I believe AEP’s shareholders will continue to enjoy cash returns in the form of dividends. Furthermore, based on my price target of $69 for AEP, the stock offers price appreciation of 19%. Strong Growth Opportunities at AEP Utility companies are keenly investing in their infrastructure development in order to capitalize on the growth potential of the industry. As far as AEP is concerned, the company, like all other utility companies, has escalated its scale of transmission investments in order to maximize its growth opportunities by utilizing the strong potential of regulated transmission operations. The company has acquired a dominant stake in leading U.S.-based transmission projects and its management feels that there is still a lot of work left on the transmission business side, due to which it constantly allocates a huge portion of its CAPEX to transmission-related projects. Year-to-date, AEP has around 2,000 ongoing transmission projects of both small and large scale. And it plans to take in more projects in future, by spending around $5.2billion on transmission-related projects in 2015 to 2017. These transmission-related investments offer huge growth opportunity for the company by means of rate base expansion, which will ultimately better its ROE, top-line and cash flows in the years ahead. AEP recently got rate increase approval from regulators; AEP got rate case increase approval in West Virginia and Kentucky for $75 million and $45.4 million , respectively. Owing to the recent rate increases and due to the strong potential of its transmission investments, I expect the company’s earnings to grow decently in the years ahead. Moreover, I believe that if AEP moves ahead with its plan to sell 7,900MW competitive business assets, it will have sufficient cash available in future to fund its transmission investments. Currently, the decision to sell the company’s competitive assets is on hold due to the pending PPA decision and due to the pending results of the PJM capacity auction. The company has asked regulators to finalize their decision on the PPA by October 1st in order to help it have a clear picture about the future of its competitive assets. Given the fact that Ohio’s deregulated market has placed AEP’s competitive assets at a disadvantage to its peers, I believe the company will go on with the idea of selling its competitive assets. If the company decides to sell its competitive assets, AEP will have a broader regulated asset base, comprising of rapidly growing transmission business, which will portend well for its long-term growth potential. Also, analysts are expecting a healthy next five-years growth rate of 4.93% for AEP, as shown below. Source: Nasdaq.com Furthermore, AEP is making regular efforts to address the growing concerns over environmental pollution. In this regard, the company has already closed 5600MW of its 10 coal fired plants across five different states and expects to close one more plant of 998MW in 2016. Given the fact that recent “Clean Power Plan” from Obama demands a 30% cut in carbon dioxide emission from power companies, I believe the company’s decision of actively closing its coal-fired plants will improve its image and positively affect its cost structure. AEP is already working on an attractive costs saving plan “Lean Deployment”, under which it is actively seeking to lower its cost burden and improve its profit margins. Investors Remain Rewarded At AEP The company has a strong history of making attractive cash returns to shareholders in the form of dividends. Earlier this month, AEP had announced a quarterly dividend payment of $0.53 per share. The stock offers a dividend yield of 3.63% and has a modest payout ratio of 59% . Given the company’s strong fundamentals, AEP’s management has affirmed their commitment to consistently increase dividends in the years ahead, and AEP targets long-term payout ratio to be in a range of 60% to 70% . Analysts are also expecting the company’s book value and cash flows per share to increase in 2016 and 2017, as shown in the chart below. Source: 4-traders.com Uplifted Guidance For 2015 Based on the company’s strong results in the first half of 2015 and due to its on-track strategic growth efforts, AEP’s management has uplifted the earnings guidance for 2015. As per the updated guidance, the company’s EPS for full year 2015 is expected to be in a range of $3.50 to $3.65 , up from the previously issued guidance of $3.40 to $3.60. AEP also raised its CAPEX guidance for 2015 by $200 million for 2015. Price Target I reiterate my previously calculated price target of $69 for AEP, which was calculated using the dividend discount method. In calculating this price target, I used cost of equity of 6% and nominal growth rate of 3%. The stock offers potential price appreciation of 19% based on my price target. Risks The ongoing development programs at the transmission business side of the company might result in cost overruns or delays, due to potential laxness in execution projects by AEP’s management. Furthermore, tightening environmental compliance regulations, unforeseen negative economic changes and adverse weather conditions are key risks that might hamper the company’s future stock price performance. Conclusion I reaffirm my bullish stance on AEP due to its strong business fundamentals. The company’s regular transmission business investments have placed it on a strong top-line growth-generating path by enabling AEP to expand its rate base. Also, the company is most likely to sell its competitive assets, which will not only support AEP’s capital investment plan, but will also broaden its regulated asset base, which will strengthen its cash flow base in the years ahead. Moreover, I believe AEP’s on-track cost saving efforts will improve its profit margins. Given the strong growth potential of the company’s attractive strategic growth initiatives, I believe its cash flows will improve, which will support its dividend growth in future. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Safe 11% Annual Return With Cleco

Summary CNL offers an escape from market volatility. It also offers a double digit arbitrage yield. Here is why I own it and you might want to, too. Safety first! Deal Target Description Cleco (NYSE: CNL ) is a public utility holding company with subsidiaries that provide retail and wholesale electricity in Louisiana and Mississippi. It owns natural gas pipelines and interconnections at all generating facilities. Deal Terms On October 20, 2014, CNL announced a definitive deal to be bought by a group led by Macquarie Infrastructure and Real Assets/MIRA and British Columbia Investment Management Corporation/bcIMC, along with John Hancock Financial and others for $55.37 per share in cash. Deal Financing The deal is not conditioned upon the receipt of financing. The target is working with Goldman Sachs (NYSE: GS ) on the deal. Deal Conditions The deal is subject to normal closing conditions, including the approval of CNL shareholders, the approvals of the Louisiana Public Service Commission/LPSC and the Federal Energy Regulatory Commission/FERC, and HSR antitrust clearance. Deal Price There is currently a net spread of about $1.63 which works out to an 11% annual return if the deal closes around early December 2015 as anticipated. The deal price was at a 15% premium to CNL’s previous market price. Deal History Bruce Williamson, CNL’s CEO, is a money maker and a deal guy. So after he was named CEO in 2011, deal speculation started to build. His stock price appreciated by about 30% in his first thirty months in command. Then he began to look to sell. He has a generous package in a change of control. He gets three times his base and bonus in a deal. This was my favorite utility takeover candidate for 2014. By April 2014, Williamson definitively decided to sell. By June, he had hired GS to manage the sale process. Once the LPSC approved CNL’s formula rate plan, there was strong interest in the company from potential buyers. CNL holders approved the deal in February 2015. CFIUS cleared the deal in June 2015. FERC approved the deal in July. The FCC has approved the requisite license transfers. HSR approval was secured. The gating regulatory approval remains LPSC clearance which is expected in the fourth quarter. The hearings are scheduled for November 9-13, 2015. Deal Alternatives If the current deal falls through, alternative buyers for CNL would include American Electric Power (NYSE: AEP ), NextEra (NYSE: NEE ), CenterPoint (NYSE: CNP ), and Iberdrola SA ( OTCPK:IBDRY ). Merger Agreement Specific Performance: The parties agree that irreparable damage may occur and that the parties may not have any adequate remedy at law in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that, subject to Section 8.11(b) , in the event of any breach or threatened breach by any other party of any covenant or obligation contained in this Agreement, the non-breaching party shall be entitled to seek an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions of this Agreement, without the necessity of posting bonds or similar undertakings in connection therewith, this being in addition to any other remedy which may be available to such non-breaching party at law or in equity, including monetary damages. Material adverse effect on the Company means any change, effect, event, occurrence, development or state of facts (I) that is materially adverse to the business, financial condition, assets, liabilities, results of operations or properties of the Company and its subsidiaries, taken as a whole, but excluding any of the foregoing to the extent resulting from changes in international or national political or regulatory conditions generally (in each case, to the extent not disproportionately affecting the Company and its subsidiaries, taken as a whole, as compared to similarly situated persons), changes in the economy or the financial, commodities or securities markets in the United States or elsewhere in the world or the industry or industries in which the Company or any of its subsidiaries operates (in each case, to the extent not disproportionately affecting the Company and its subsidiaries, taken as a whole, as compared to similarly situated persons), changes or developments in national or regional wholesale or retail markets for electric power, capacity or fuel or related products (in each case, to the extent not disproportionately affecting the Company and its subsidiaries, taken as a whole, as compared to similarly situated persons), changes or developments in natural or regional electric transmission or distribution systems (in each case, to the extent not disproportionately affecting the Company and its subsidiaries, taken as a whole, as compared to similarly situated persons), any changes in law or GAAP or interpretations thereof (in each case, to the extent not disproportionately affecting the Company and its subsidiaries, taken as a whole, as compared to similarly situated persons), any weather-related or other force majeure event or outbreak or escalation of hostilities or acts of war or terrorism (in each case, to the extent not disproportionately affecting the Company and its subsidiaries, taken as a whole, as compared to similarly situated persons), the failure in and of itself of such person to meet any internal or published projections, forecasts or revenues predictions, provided that the exception in this clause (G) shall not prevent or otherwise affect a determination that any change, effect, event, occurrence, development or state of facts underlying such failure has resulted in, or contributed to, a material adverse effect on the Company, the negotiation, execution or announcement of, or compliance with, this Agreement in accordance with the terms hereof (including any adverse changes in the relationship of the Company or its subsidiaries with its employees, independent contractors, customers or suppliers resulting directly therefrom), provided that the exception in this clause (H) shall not apply to the representations and warranties contained in Section 3.01(d) to the extent that the negotiation, execution or announcement of, or compliance with, this Agreement would result in a breach or inaccuracy of the representations and warranties set forth in Section 3.01(d), or any taking of any action by the Company or its subsidiaries at the express written request of Parent, or (ii) that would prevent or materially delay the Company from performing its obligations under this Agreement or consummating the transactions contemplated hereby. Conclusion CNL offers a compelling long opportunity to capture a safe double digit annual return for the remainder of 2015. Disclosure: I am/we are long CNL. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital. Rangeley invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our investors, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.

VDAIX: Vanguard’s Major Dividend Mutual Fund Needs Oil And Utilities

Summary VDAIX offers investors a great start to building a dividend portfolio. The fund is missing almost all exposure to the utility sector and to oil and gas. The expense ratio on the investor class of shares is .2%, which is higher than I would want to see for a long term holding. If an investor builds a portfolio around this fund they should be adding their own utility and oil exposure. CVX and COP offer great dividend yields. A very well diversified equity portfolio would also use some equity REIT exposure from another ETF. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs. Despite my frequent use of ETFs in my personal investing, many retirement accounts still use mutual funds as a major source of their investing. When it comes to assessing the mutual funds, one of my earlier favorites is the Vanguard Dividend Appreciation Index Fund (MUTF: VDAIX ). Largest Holdings I’m starting the analysis by looking at the largest holdings in VDAIX. As you can guess from the name there is a heavy emphasis on receiving dividends from the portfolio. (click to enlarge) Where is the Oil? Granted oil prices are plummeting and oil stocks may seem “risky”, but a small inclusion would be entirely appropriate for a portfolio focused on dividends. The yields are high and the companies would benefit from higher gas prices while many parts of the economy would be disadvantaged by high fuel prices. For diversification purposes it is very strange not to have them included. Big oil can pay some big yields. ConocoPhillips (NYSE: COP ) has a dividend yield around 5.75%. When the mutual fund is yielding slightly over 2% it seems like adding some COP to the portfolio would be an excellent choice. It provides more diversification to the portfolio and a much stronger yield. Phillips 66 (NYSE: PSX ) is only yielding 2.6%, but that would still benefit the yield across the entire fund. Chevron (NYSE: CVX ) has a yield around 5%. Those all seem like viable options to me. If the portfolio is really focused on taking dividend income I would think COP and CVX would be a natural fit for the top 10 holdings. Diversification Benefits The correlation to SPY is just under 97%, so diversification benefits are not very substantial. However, the volatility on the fund is materially lower at only 87% of the level on SPY which is nice for investors that would prefer more stability in their portfolio values. Expense Ratio The mutual fund is posting an expense ratio of .20%. I want diversification, I want stability, and I don’t want to pay for them. An expense ratio of .20% may seem pretty good to many investors but this falls below my level expectations for Vanguard. Since Charles Schwab (NYSE: SCHW ) cut their expense ratios on ETFs and ensured the two were locked in a price war it has been easier for me to find very low expense ratios. With that said, .20% certainly isn’t bad. It just isn’t up to the level I want to see on my investments since I’m looking at the expected returns on periods greater than 30 years and the compounding effects of a high expense ratio can severely reduce an investor’s total wealth over a time period measured in decades. Sector Allocations To go a little deeper into the absence of the major oil companies I like to see included in a dividend growth portfolio, I grabbed a chart of the sector allocations. (click to enlarge) If you were to combine oil and gas with the utility sector the combined weight would still only be 3.5%. In my opinion the combined weight should be at least 20% and I wouldn’t object to seeing it even higher. Conclusion This is a pretty good fund but these investor class shares of the mutual fund carry an expense ratio of .2% which is higher than I would like to see. The bigger issue for many investors may be that the portfolio does not fulfill the reasonable level of diversification for the equity portion of a portfolio. If an investor wants to tie up a significant portion of their 401k account in VDAIX they would be wise to also hold funds that provide them with a material exposure to both utilities and oil and gas. For the sake of diversification, especially in a tax advantaged account, I would suggest including some equity REIT exposure to give the portfolio a more thoroughly diversified set of exposures while increasing the dividend yield since most equity REITs and utilities offer higher yields. Of course, using some CVX or COP is another solid way to boost yields even further. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.