American Electric Power’s Dividend Has a Data Center Tailwind. How Safe Is It?
AEP just unveiled a $100 billion spending plan built around data centers, and income investors are asking who gets paid first. One Texas deadline in December could decide whether shareholders or new share issuance absorb the pressure.
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American Electric Power (NASDAQ:AEP | AEP Price Prediction) just raised its quarterly dividend to $0.97. The stock goes ex-dividend on Nov. 10. The increase came just before the utility rolled out a $100 billion five-year capital plan focused on data center demand. Income investors want to know whether that spending boom makes the payout stronger or competes with it for cash.
Earnings Cover the Payout With Room to Spare
The new rate works out to $3.88 a year. At $129.48 a share, that is a yield of about 3.0%. Management expects 2026 operating EPS at or above the top of its $6.25 to $6.55 range. Measured against $6.55, the payout ratio is roughly 59%. Against the low end of 2028 guidance, $7.40, it drops to about 52%.
The track record helps too. The quarterly payment has risen from $0.35 in 2004 to today’s level. Long-term holders should keep in mind that AEP cut the dividend in 2003, from $0.60 to $0.35, the kind of reversal that usually signals itself first (we listed the seven warning signs in a free report here: Dividend Traps).
Data Center Contracts Put a Floor Under Cash Flow
Third-quarter operating EPS came in at $2.23, beating the $2.04 consensus. AEP signed 15 GW of new load commitments in the quarter and now expects 84 gigawatts of additional contracted load by 2031. Firm take-or-pay agreements back 35 gigawatts of that total. CEO Bill Fehrman put it this way:
“As electricity demand accelerates, AEP is committed to having new large-load customers bear the incremental system costs they create and fund the investments required to serve them.”
He also told analysts, “We have collected over $2 billion of cash or collateral just for Texas.”
Heavy Capital Spending Slows Dividend Growth
The tradeoff shows up in how the plan gets funded. AEP expects about $55 billion of operating cash flow over five years, enough for a little more than half the plan. The company raised its equity funding assumption by $5.2 billion and already has more than $5 billion of equity forwards outstanding. Credit metrics are holding for now: FFO-to-debt is inside the company’s 14% to 15% target and above the 13% downgrade threshold. CFO Trevor Mihalik explained the dividend outlook:
“We have moderated the growth of the dividend over the last year, and we are forecasting similar, modest growth to the dividend, at roughly 2% over the four- or five-year period.”
That lines up with the latest raise of about 2.1%.
Where AEP Stands Against Its Utility Peers
NextEra Energy (NYSE:NEE) plans dividend growth of roughly 10% a year through 2026, then 6% a year through 2028, while targeting 8%+ EPS growth through 2032. Duke Energy (NYSE:DUK) has a $103 billion five-year plan and targets 5% to 7% EPS growth through 2030. AEP’s 9% to 11% earnings growth target is the fastest of the three. Its dividend growth is the slowest. AEP is keeping more cash in the business to grow its rate base to $162 billion by 2031.
Verdict: The Dividend Looks Safe, but Raises Will Stay Small
The dividend looks well covered. Earnings growth is outpacing payout growth, so the payout ratio should fall from here. Data center demand strengthens the payout mostly through contracted, take-or-pay cash flow. Shareholders won’t see much of it in bigger increases for now.
The risk to watch is Texas. ERCOT expects to file its data center audit report on December 10. If that report reduces the load AEP is counting on, it may have to fund more of the plan with new shares, which would put more pressure on the dividend.
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Chris Lange is a financial and geopolitical writer with more than a decade of experience covering a myriad of topics. He has published thousands of articles for 24/7 Wall St., with past coverage focused heavily on stocks, IPOs, healthcare, defense, global affairs, and technology.
His work has been quoted, or referenced by a number of outlets including Business Insider, USA Today, Yahoo Finance, MSN, The Motley Fool, and many other publications. A graduate of Southwestern University, he studied business with a focus on investments and has previous experience in banking and startups.
When not reading or writing the news, he is following his passion for Lacrosse, playing chess, or building solar projects with his dad.
