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American Electric Power (AEP) is fairly valued at a forward P/E of 13.6x and PEG of 4.1, as compared to its competitors. AEP has a dividend yield of 4.2%, which is slightly on the lower side when compared to its peers: Duke Energy (DUK) yields 4.5% and Southern Company (SO) yields 4.4%. Also, AEP has modest next five years growth rate of 3.5%, lower than DUK's 3.6% and SO's 5%. Therefore, I reiterate a neutral rating for AEP.

AEP reported healthy numbers in its recent earnings release. It was able to beat both top and bottom lines' consensuses for 4Q'12. A positive thing for the company was that it was able to beat analysts' consensus given the slow growth in electricity demand.

AEP posted fourth quarter revenues of $3.6 billion, up 6%, beating analysts' consensus of $3.55 billion. However, annual revenues of $14.9 billion for 2012 missed consensus by $0.55 billion. Annual revenues also came below the 2011 revenue figure of $15.1 billion.

In the most recent quarter, AEP posted operating earnings per share of $0.50, beating the analysts' consensus of $0.46. Quarterly operating earnings also came higher than 4Q'11 operating earnings of $0.40. Full year earnings of $3.09 per share were also above analysts' consensus of $3.04. Operating earnings per share for the most recent quarter was positively affected by a rate relief of $0.09, lower O&M of $0.05, and lower state tax of $0.06.

The most important segment that resulted in operating earnings growth was Utility Operations. In the recent fourth quarter, operating earnings contributed by Utility Operations grew by 60% YoY to $283 million. The increase in segment's operating earnings was mainly due to positive rate cases and cost control efforts, partially offset by customer switching in Ohio and unfavorable weather.

More than 85% of AEP's earnings are derived from regulated operations, which are expected to deliver growth going forward as a result of rate increases. Also, corporate restructuring efforts are likely to have positive impact on the bottom line. The company is planning to cut almost 19,000 jobs under its restructuring plans.

Outlook

AEP provided operating earnings guidance range of $3.05 - $3.25 per share and $3.15 - $3.45 per share for 2013 and 2014, respectively. The company is targeting 4% - 6% long-term earnings growth; considering 2013 as a base year. Analysts are anticipating operating earnings per share of $3.14 for 2013 and $3.31 for 2014.

Dividend and Debt

AEP offers investors a decent dividend yield of 4.2%. Currently, AEP has an annualized dividend rate of $1.88 per share and it has increased its dividends at almost 5% annually since 2005. Also, the company indicated its long-term payout ratio to remain in the range of 60%-70% and dividends are likely to grow 4%-6% in line with earnings growth.


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Source : aep.com

Furthermore, AEP is committed to strengthening its balance sheet as it has been lowering its debt to capitalization ratio. It currently has debt to capitalization ratio of 55.2% down from 62.5% in 2008. AEP also has strong credit stats; FFO interest coverage of 4.6x and FFO to total debt of 19.9%. S&P and Fitch have assigned a 'BBB' credit rating to AEP.


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Source: Investors Presentation

Following chart shows debt maturity profile for the company from 2013 to 2017.


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Source: Company Fact book

Valuation

AEP

Southern Company

Duke Energy

Exelon Corp. (EXC)

Forward P/E

13.6x

15.1x

14.8x

13.5x

PEG

4.1

3.3

4.4

-

5 Year Growth Rate

3.5%

5%

3.6%

-

Dividend Yield

4.2%

4.4%

4.5%

4.05%

Source: Yahoo Finance

AEP is currently trading at a lower forward P/E 13.6x as compared to SO and DUK, but I believe SO and DUK have higher forward P/E's because of size premium (larger size as compared to AEP) and higher dividend yields than AEP.

Source: AEP Is Not The Best Out There, Despite The Earnings Beat