If You're a Defensive-Minded Investor You Should Consider American Electric Power

In times of economic uncertainty, American Electric's reliable profits and hefty dividends become all the more valuable.

Apr 4, 2014 at 11:15AM

Aep

It's no secret that the economy in the United States is far from booming. We're still struggling with persistently high unemployment and frustratingly slow economic growth. And yet, the stock market as measured by the S&P 500 Index soared some 30% last year. For risk-averse investors who think the stock market's rally may have gotten ahead of itself, now might be the time to get defensive.

Conservative investors, as well as those who prefer to receive steady income from their investments, would do themselves a favor by considering buying stocks in sectors of the economy that are relatively insulated against economic downturns. One such sector is electric utilities, many of which are pillars of stability thanks to their reliable profits and juicy dividend yields. Specifically, American Electric Power (NYSE:AEP) definitely fits the bill.

Slow and steady wins the race
American Electric Power isn't likely to be featured in the financial media any time soon as the next hot stock story of the day. It operates a fairly boring business model, and doesn't promise investors get-rich-quick type of growth. On the other hand, that may be exactly what makes American Electric Power so valuable, especially in uncertain economic times.

American Electric Power grew its profits from core operations by 5% last year, continuing a long-term trend of producing consistent and reliable earnings. Even when the economy in the United States was brought to the brink of collapse during the depths of the Great Recession, American Electric generated stable profits and continued to pay dividends to shareholders.

This stands to reason, of course, since consumers have little choice but to keep the lights on, even when the economy suffers a downturn. This is one of the best features of investing in a utility stock. Its product is quite literally something people can't do without.

These are the same characteristics that have allowed utilities like American Electric and Consolidated Edison (NYSE:ED) to maintain impressive track records of rewarding shareholders. Consolidated Edison recently upped its dividend for the 40th consecutive year, and owes its dividend track record to its reliable business model. It increased profits from continuing operations by 1% last year.

Consider how well American Electric performed, even during the worst years of the recession. American Electric grew its net income by 26% in 2008, then suffered just a 1.6% decline in net income in 2009. These represented the worst years of the financial crisis, and yet, American Electric sailed through unscathed.

American Electric Power's results compare favorably to Exelon (NYSE:EXC), which saw much more volatility in its operations than utility investors probably prefer. Exelon functions in a different model of electricity generation than American Electric, which explains the variation in its underlying results. Exelon is a major nuclear operator, and poor pricing in that market resulted in highly fluctuating earnings last year.

Exelon swung to a loss in the first quarter last year, but to its credit, has recovered somewhat since then. Still, its core operating profits fell 7% last year. And, Exelon doesn't see an improvement occurring this year. At the midpoint of its guidance, management forecasts a 4% decline in operating profits in 2014.

This stands in stark contrast to American Electric, which maintains a long-term future target of 4%-6% earnings growth, driven by transmission growth, investment in its infrastructure, and cost cuts.

The Foolish bottom line
The U.S. economy is five years removed from the heart of the Great Recession, but we still live in an uncertain time. Economic growth is still frustratingly low, and with the stock market roaring to new all-time highs recently, it's not entirely unreasonable to ask whether the market is a bit frothy. If you think we're on the brink of a downturn, utility stocks could be a suitable place to ride out the storm. One utility that deserves your attention for its remarkable consistency is American Electric Power.

American Electric did a great job navigating the last recession, and has paid uninterrupted dividends for more than 400 consecutive quarters. In fact, American Electric has a great track record of increasing its payout, which indicates its reliability. It gave investors two separate dividend increases last year, and yields a hefty 4%. That's why defensive or risk-averse investors would do well by considering American Electric Power.

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Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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