One Of The Most Stable Stocks For Any Investment Portfolio
Stock market volatility has increased. But you can’t eliminate the ups and downs.
However, with AEP stock & its dividend. You may be able to smooth the ride a little.
So today, let’s dive into American Electric Power stock. And work through an AEP dividend stock analysis.
Maybe AEP stock is a good place to stash some investment dollars. Let’s find out. And start with some key takeaways…
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
AEP Stock Dividend Analysis: Key Takeaways
1. AEP is stable, steady, and consistent dividend growth stock. Operating in the U.S. regulated utility sector.
2. It has a 3%+ dividend yield. And 5-7% projected dividend growth. Plus adequate dividend safety with a dividend payout ratio below 70%.
3. As of the time of this update, the stock looks reasonably valued.
4. Assuming the company is successful at executing its business plans. An investor can reasonably expect 8-10% total returns over the long run.
5. So, I expect the stock will trade above $100 per share in the next 2-4 years. A level it has not seen since early 2020.
Are you like me and always on the hunt for new dividend stocks to invest in? If yes. Then, I have a couple of “go-to” sources I would like to suggest.
First, there is the Simply Investing report. It focuses on both U.S.-based and Candian-based companies that pay regular dividends.
I also like the Motley Fool Stock Advisor. For its insightful stock reviews and recommendations.
Okay. With those highlights and thoughts taken care of. Let’s get into the details. Starting with some background on the company.
AEP Company Background
AEP calls itself a “premier regulated energy company”.
They make money primarily by producing, transmitting, and selling electricity to customers. In states centered around Ohio in the Midwestern U.S. And Texas in the South.
Source: About AEP
Profits break down by the areas shown in the chart below.
Chart 1: AEP Profit By Operating Segment
Vertically integrated means the generation, transmission, and distribution of power to customers. In other words, where AEP handles the entire chain of production and supply.
While the other segments include profits where AEP handles only parts of the supply chain. This requires the company to work with other utility companies. They handle either generation or transmission and distribution on AEP’s behalf.
AEP Growth Strategy
Revenue and profits grow over the long run as the company invests in capital improvement projects. The cost of these projects plus a profit margin is then passed on to customers.
However, the economics of these projects must be approved by regulators. And, it is up to AEP to effectively manage the cost of these projects without cost overruns during construction. This is the essence of a regulated utility business model.
Most of the company’s capital spending plans for the next several years focus on regulated investments. So, maintaining positive relationships with regulatory decision-makers is very important.
AEP Stock Symbol
American Electric Power stock trades on the NASDAQ Stock Exchange. It trades under the ticker symbol AEP (NASDAQ: AEP).
When I buy (and hopefully never sell) my dividend stocks. I use the Webull app. It’s fast and powerful. And has great research tools.
And best of all, trades are commission-free. You can learn more about Webull here.
That completes the business overview portion of today’s AEP stock analysis. So, moving right along with our feature company.
Next up, let’s learn everything about dividends paid by AEP.
AEP Dividend Rate Per Share
AEP stock pays an annual forward dividend of $2.96 per share.
The annual forward dividend is the last cash dividend payment approved by the company. Multiplied by the number of times a company pays dividends each year.
AEP Stock Dividend Yield
At the recent AEP stock price, an investment in AEP shares offers a 3.5% dividend yield.
How Often Does AEP Pay Dividends?
AEP stock pays dividends every 3 months or 4 times per year. Each quarterly dividend payment is one-fourth of the annual rate.
When Does AEP Pay Dividends?
What is the timing of the dividend payments from AEP? Well, they are paid on or around the 10th day of the month that closes out each calendar quarter. Specifically, March, June, September, and December dividends.
When Is The Ex-Dividend Date For AEP Stock?
For an investor to receive AEP’s next dividend payment. One must complete their purchase of AEP stock before the ex-dividend date.
AEP’s ex-dividend date is approximately 1 month before each quarterly dividend is paid.
The dates vary slightly each quarter. So, it’s a good idea to check the company’s investor relations site. For the latest. On each of the announced quarterly dividend information.
AEP Stock Dividend Growth
Let’s see if AEP’s dividend growth is stable and steady. Like I described at the beginning of the article.
Table 1: AEP Compound Annual Dividend Growth Rate
|1 Year||3 Years||5 Years||7 Years|
As you can see from the table above, AEP stock dividend growth has been steady in recent years.
Near the end of 2018, the company announced a very substantial dividend increase of 8.1%! On the other hand, most of the other annual dividend increases tend to be more modest in size. Hovering around the 5% mark.
Related: Duke dividend stock analysis
AEP Dividend History
AEP has an long and impressive dividend history.
First of all, management is proud to point out that AEP has paid a cash dividend every quarter since 1910.
Furthermore, AEP has paid higher dividends each year. Dating back to 2010.
The annual dividend increase streak is small compared to some companies. But, qualifies as Dividend Achiever status.
AEP Dividend Policy Statement
I like it when a company has a clearly stated dividend policy. And, AEP does not disappoint me here.
The company communicates in its recent investor presentation materials that they expect earnings to grow 5-7% annually. And they intend to increase the dividend each year at a similar rate.
Also, management is targeting a dividend payout ratio of 60-70% of operating earnings.
Source: AEP events and presentations
For now, that concludes our review of the AEP dividend. Let’s transition to the business fundamentals. That will then allow me to address some other aspects of the dividend. A little later on.
AEP Historical Revenue Trend
As shown in the chart, AEP’s revenue holds in a tight range.
Chart 2: AEP 7-Year Revenue Trend
As a regulated utility, this company is not a high-growth stock. Because the underlying demand for the company’s energy products and services increases slowly.
Revenue growth in the very low single-digit percentages on an annual basis is common. Similar to the rate of growth within the local economies in which the company operates.
Unfortunately, these economies took a hit in 2020. Due to the recession.
AEP Earnings & Dividend Payout Ratio
As shown in the chart below, earnings have grown on average a little over 5%. Dividend growth has been similar.
And, the dividend payout ratio consistently runs less than 70% of earnings.
Chart 3: AEP 7-Year Trend Of Earnings And Dividends
Management’s projections for the future are similar to how they have operated in the past. But, as they say, past performance does not guarantee future results.
On the other hand, their track record is very consistent. It makes AEP one of the most stable stocks to buy.
AEP Free Cash Flow And Dividend Payments
Evaluating dividend payments versus cash flows is often times not relevant for regulated utilities.
Because these businesses have large capital investment requirements. The investments often consume more cash than the company generates.
Due to the predictability of their stable and regulated businesses, they can finance those expenditures with long-term debt. Debt payments are supported by the revenues and profits the capital expenditures generate.
So, earnings are usually the best measure of a utility’s dividend-paying capacity. Not cash flow.
And as we have seen. AEP is operating in its target dividend payout ratio range of 60%-70%. Based on earnings and dividends per share.
Next, let’s check the company’s credit rating. And financial position. Then I can circle back to some additional points about AEP’s dividend.
AEP Credit Rating
According to Moody’s and S&P, AEP is rated Baa2 and BBB+.
Table 2: Credit Rating Evaluation Grid
Source: FINRA Bond Center
By looking at the table above, we can see this is “investment grade-moderate credit risk”. Although not the highest of ratings, AEP is still rated investment grade. Like other quality dividend stocks.
And the consistency of AEP’s business. Gives me little concern about their ability to pay off or refinance debts as they come due.
On a side note, be sure to keep an eye on your personal credit score. I check mine for free using Credit Karma. You can learn more about Credit Karma here.
Furthermore, investing in dividend stocks is just one aspect of solid money management. It’s also a good idea to treat your entire financial picture as a business.
To do so, I manage all of my investments and spending in one place. By using web-based Personal Capital. You can learn more about Personal Capital here. It’s easy to sign up. And free to use.
Back to AEP…
AEP Financial Positon
In general, regulated utilities are very capital and asset-intensive. As previously mentioned, those expenditures are mostly funded by debt.
AEP debt to equity checks in at 1.6 to 1. This is a relatively high debt load, but not dissimilar from other regulated utilities.
AEP Stock Dividend Safety
I base my judgment on dividend safety using the information discussed thus far.
- Business fundamentals
- Dividend payout ratios
- Historical dividend track record
- Credit ratings
- Financial position
As a result, I consider AEP’s dividend safe from a reduction for the foreseeable future.
However, I will keep an eye on cash flow, credit ratings, and debt levels for any signs of deterioration. That could put the dividend at risk going forward.
AEP Dividend Growth Projection
Since I partly live off cash from dividends, I forecast my future dividend income. So, I know how much cash will be coming in.
To do this, I make a dividend growth projection for each of my dividend stocks. The projection also sets an expectation. Which I can use to compare future dividend increase announcements.
To make my forecast, I look at…
- Historical dividend growth
- Dividend payout ratios
- Management’s dividend policy when provided
- Business fundamentals
- Company growth strategy
AEP makes it pretty easy for me in this case. The company expects 5-7% annual earnings growth. And, they have stated their intent to increase the dividend by a similar amount.
So, My AEP annual dividend growth forecast is 6%.
Before wrapping up, let’s look at the AEP stock valuation…
AEP Stock Valuation
I like to view valuation from a few different angles. Understanding the current value helps me make an AEP stock forecast. And determine my own buy, sell, or hold decisions.
AEP Dividend Discount Model
The single-stage dividend discount model considers several factors I have discussed thus far.
- Current annual dividend payment
- Projected dividend growth
Plus, my desired annual return on investment. Which is 9%.
Using these assumptions, the dividend growth formula calculates the fair value of AEP stock at $105 per share.
Morningstar AEP Stock Fair Value Estimate
The investment analysis firm Morningstar believes the fair value of AEP stock to be $89 per share.
AEP Stock Price To Earnings Ratio
AEP’s stock price to earnings ratio checks in at about 20 times 2020 earnings. On a price-to-earnings basis, the stock looks a little pricey.
On the other hand, quality stocks rarely can be purchased on the cheap.
Utility Forecaster Investment Newsletter
The Utility Forecaster investment newsletter follows dividend stocks in the utility sector very closely.
That publication has a buy limit price of $92 per share or less.
AEP Stock Forecast & Valuation Summary
AEP stock currently looks a little undervalued. It may take 2-4 years, but I forecast that AEP stock will once again hit $100 per share. As it did early in 2020.
AEP Stock & Dividend Analysis: Wrap Up
I like to get dividends from stable stocks like AEP. And other regulated utilities within my investment portfolio.
Until more recently, AEP stock performed well. Turning in solid gains during 2019 and again to start off 2020.
The stock price has stalled since then. But, cash dividends and dividend increases continue to flow consistently.
AEP stock is one of my smaller positions. So, I would like to add to it over time. I think it is a good buy at recent prices. And represents a nice combination of current dividend yield. And projected dividend growth.
On the other hand, I want to keep an eye on the company’s cash flows and debt levels. To make sure any deterioration does not negatively impact dividend safety.
Further Reading About Stable Stocks In The Utility Sector & Beyond
- All about dividend stocks from Dividends Diversify
- Supercharge your dividend growth with NextEra Energy
- Higher dividend yield from Southern Company
- Dominion (D) for dividend income & dividend income growth
- One of the best utility-focused ETFs
My Favorite Dividend Investing Resources
The dividend investing and personal finance resources I mentioned in this article are summarized here for your convenience.
I use all of them. To make the most of my money and investments.
Disclosure & Disclaimer: I am not a licensed investment adviser, financial adviser, or tax professional. And I am not providing you with individual investment advice, financial guidance, or tax counsel. Furthermore, this website’s only purpose is information & entertainment. And we are not liable for any losses suffered by any party because of information published on this blog.