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

An additional issue that has to be taken into consideration is that AEP’s long-term debt was $21.6 billion at the end of 2018. That was up from $17.7 billion at the end of 2015, and that’s up from $15.5 billion at the end of 2010. Its total long-term liabilities were counted as $41 billion at the end of 2018, after having risen gradually almost every year from the $30.3 billion in total long-term liabilities at the end of 2010.

S&P and Moody’s both have investment-grade credit ratings (BBB+ and Baa1, respectively) with stable outlooks for the parent company. Its ratings are mixed among operating subsidiaries, but their outlooks are all shown to be stable and investment-grade. If those ratings change, or if major utilities become deemed more at-risk, then it could pose additional challenges for AEP common shareholders as the risks trickle down.

It has become ever harder to use historic comparisons of the prior 50 years now that industry valuations have changed so much and after a period of nearly zero percent interest rates lasted years longer than it should have done. But think about returns without considering dividends, which is not really a fair evaluation but has to be done using historical charts data. A gain of close top 150% in AEP this past decade compares to a round-trip zero for long-term capital gains in the prior decade. AEP’s share price nearly doubled in the 1980s, but it was range-bound in the 1990s and did next to nothing for long-term gains, without considering its dividends.

AEP shares have outperformed the S&P 500’s 19.5% gain so far in 2019 (and a 15% gain in the Utilities SPDR ETF) with a total return of 21%. Trading at $90.00, it has a 52-week range is $68.13 to $91.99, and its consensus target price from Refinitiv was last seen under the current share price at $88.31. Merrill Lynch is an exception to the norm among Wall Street analysts, recently reiterating its Buy rating and raising its price objective to $98 from $93.

Investors used to see value in utilities stocks, and they used to see much higher dividend yields. Many of the balance sheets have grown over time. Between now and 2029 to 2030, there will have been three more presidential elections, the power in Congress may have shifted once or twice, there may have been one or two recessions, the tax code for corporations and investors may have changed and the regulations and structure of the economy may be up for grabs. That’s a lot to stomach for the utilities sector. It’s a difference of night and day from where we sat at the end of 2010.

AEP still may be considered a stock to own for the next decade if an investor has been a long-term holder and might be considering whether to lock in gains to reinvest into another solid utility operator that’s also at a market premium and with the market at all-time highs. That doesn’t mean that new investors who are trolling for new ideas should be piling into AEP — and likely the same goes for AEP’s rivals.

The utilities sector largely has become harder to commit new capital into at current high share prices and valuations. That said, long-term shareholders don’t necessarily need to run for the exits.

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