We have maintained our Neutral recommendation on
American Electric Power Co., Inc.
) on Oct 09, 2013.
Why the Reiteration?
American Electric Power has a stable earnings base of
approximately 5 million customers spread over 11 states. This
diversification provides stability to the revenue stream and
insulates the company from adverse regulatory decisions and the
detrimental effects of lower sales in any particular service
In order to enlarge its stable earnings base, American Electric
Power has focused its capital expenditure on its regulated
business. Furthermore, the company's geographically diversified
nature allows it to avail transmission opportunities with better
returns, compared to its single-state utility peers.
The selective focus on transmission expansion will allow the
company to attain its 4% - 6% long-term EPS growth target. This
long-term growth target is expected to be driven by capital
allocation, regulatory recoveries, performance improvements that
benefit customers, operations and bottom-line performance. The
Zacks Consensus Estimate for the third quarter 2013 is $1.08, up
a projected 5.88% year over year.
Though the second quarter results were adversely impacted by
higher operations and maintenance expenses (O&M), the company
is on track to curb O&M. The company's cost-control
initiatives, particularly overhead cost, are expected to reap
benefits in the second half of 2013. It expects O&M expenses
to be flat year over year in 2013.
The company's three plants are under lean process
implementation that calls for shedding waste in order to reduce
costs and increase competitiveness. The company has saved $5
million to $10 million per plant in this analysis. In 2014, the
company plans to put six to eight plants under this process.
Altogether, it plans to bring 15 to 20 plants under this process.
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With a strong liquidity position of $3,447 million, American
Electric Power remains well positioned. The company has been
returning wealth to its shareholders via dividends since Jul
2010. The company pays a quarterly dividend of $0.49 per share
that represents a high dividend yield of 4.49%.
Despite these positives, tepid economies in a number of its
service states, weak residential, commercial and industrial sales
and its predominantly fossil fuel based generation assets may
restrict opportunities for future performance.
Other Stocks to Consider
American Electric Power Co. presently retains a Zacks Rank #3
(Hold). Stocks that are worth considering in the space are
Alliant Energy Corporation
Brookfield Infrastructure Partners L.P.
), all with a Zacks Rank #2 (Buy).