How the Case for Owning American Electric Power for the Next Decade Has Changed

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With a new decade on the horizon, investors need to be considering what worked over the past decade and whether they should expect the same or different outcomes for what will work in the decade ahead. It seems almost impossible to expect another 350% rally in the S&P 500 from the start of the bull market when shares bottomed out in March of 2009. That said, some of the performance over the next decade may depend on how much the market and sectors pull back when and if that next recession arrives, as the media has warned us about year after year.

American Electric Power Co. Inc. (NYSE: AEP) is a stock selected as one of 10 stocks to own for the next decade way back in November of 2010. AEP remains one of the largest publicly held electric utilities in America, but the difference in 2019 is that it was valued at $17.8 billion in late 2010 and was worth almost $45 billion on last look. Without adjusting for dividends, AEP’s price was $37.05 in late 2010 when we named it among the 10 stocks to own for the decade, but more recently the stock was at $90.00. That’s a gain of more than 140%, without factoring in the dividends, though the dividend is perhaps the primary reason so many investors have bid up utilities in the past decade. 24/7 Wall St. even went as far during the zero interest rate climate as calling out utilities stocks as the replacement for bank-issued CDs (certificates of deposit).

Most stocks and asset classes should not be thrown out or given poor future ratings just because they have performed quite well. After all, great companies have risen and risen over the decades. AEP and other major utilities probably will have to expect much more modest returns ahead. If you add in close to $20 worth of dividend payments over almost nine years, without even considering reinvesting on the way up, AEP has a total return profile of closer to 200%.

To be considered a stock to own for the next decade back in 2010, a company had to be highly established with a solid outlook for secular trends. None of the companies had business models that were going to implode under the “new normal” or “post-new-normal” regulatory climate of the time. There was no effort to pick the companies with the highest risk and reward because so many investors were still deeply entrenched into recession-mode. After all, U.S. unemployment was over 9% then, and U.S. gross domestic product has risen by more than one-third to $21 trillion since that time.

Those 10 picks were a novice investor’s watch list of go-to stocks to consider adding to their portfolios when a buying opportunity presented itself. The “buy and hold” strategy was gutted during the Great Recession, but it has proven to be far better than the “trade-in and trade-out” strategy that many investors employed during the past decade. While AEP still seems to fit within the “buy and hold” and “safety trade” strategies heading into 2020 as a stock to own for the next decade, there are some obvious additional risks now compared with a decade ago.

One reason AEP was selected over other utilities in 2010 was that it always seemed to be very dividend friendly, with years of rising payouts. It even had a 4.9% yield back in 2010, and the company was promoting a “Defend My Dividend” campaign that was fighting against potential tax increases on dividends and gains at that time. Since late in 2010, AEP’s per share payout is up almost 50%, but a massive rise in its share price creates a dividend yield of just under 3% in 2019. Its revenue was just over $16 billion in 2018, up from about $14.4 billion in 2010.