American Electric Power: Steady And Sustainable

| About: American Electric (AEP)


American Electric Power had a good Q3.

Revenue and net income has been solid.

Income investors will do well investing here.

On November 1, American Electric Power Co., Inc. (NYSE:AEP) reported their Q3 results. Q3 EPS of $1.30 beat estimates by $0.08, and revenue of $4.7 billion beat estimates by $20 million. Utility stocks are seen as reliable sources of dividend income, and the only glaring exception I have seen to that thus far is Exelon (NYSE:EXC), which I covered back in August. Is American Electric Power another exception, or does it follow the traditional pattern of utilities in general?

Company Overview

Incorporated in 1906, American Electric Power today is a holding company with four company segments: AEP Transmission Holdco, which creates and develops facilities of transmission; Generation and Marketing, which include subsidiaries such as energy management, marketing, retail supply and wholesale energy trading; Transmission and Distribution, which transmit and distribute electricity for retail and wholesale customers; and Vertically Integrated Utilities, which also engages in generating, transmitting and distributing electricity for retail and wholesale customers.

American Electric Power has a market capitalization of $29.46 billion, a workforce of 17,600 employees, and is headquartered in Columbus, Ohio. It serves eleven states: Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia and West Virginia.

Competitive Advantage

American Electric Power benefits from being a regulated utility. All utilities benefit from two key advantages: geographical dominance and government regulation. The costs of switching from a utility provider are too high for most customers to bother with, ensuring that a utility will always have a customer base. Government regulations ensure that those customers are not subjected to price gouging, and also provide legislative barriers that prevent competitors from being able to easily take market share from an established utility.

The revenue and net income figures show that American Electric Power is no exception to this rule, as the stability of these figures testify to the stability of the business.

Year Revenue Net Income
2011 15.12 billion 1.95 billion
2012 14.95 billion 1.26 billion
2013 14.81 billion 1.48 billion
2014 16.38 billion 1.63 billion
2015 16.45 billion 2.05 billion
Click to enlarge


Currently, American Electric Power is trading in the high-$50 range with a forward price-to-earnings ratio of 15.80, and offers a big dividend yield of 4.04% with a sustainable payout ratio of 62.1%. American Electric Power has paid steady dividends since 2003, and its net income and revenue figures suggest that the dividend will be sustained.

American Electric Power's forward P/E ratio is slightly above its five-year average P/E ratio of 14.9, and its dividend yield is close to its five-year average dividend yield of 4.02%. The stock is trading at a significant discount to the market at this time, and is closely aligned to its own five-year average metrics.

Final Thoughts

American Electric Power is a solid, sustainable utility business. With operations across eleven states, it is one of the larger utilities operating in the country. It is a no-frills, steady income provider which will serve a long-term dividend investor's needs adequately. Its record of steady dividend payments looks set to continue due to the solid revenue and net income that it generates.

DISCLAIMER: I am not a financial professional and accept no responsibility for any investment decisions a reader makes. This article is for information purposes only. Furthermore, the figures cited are the product of the author's own research and may differ from those of other analysts. Always do your own due diligence when researching prospective investments.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in AEP over the next 72 hours.

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.