3 Factors Driving American Electric Power's Stock Higher

What keeps driving up American Electric Power’s stock? Here are three reasons behind its recovery.

Jul 22, 2014 at 5:07PM

American Electric Power (NYSE:AEP) has done well in the past year as its stock gained more than 16%, up to date. Conversely, other leading utility companies such as FirstEnergy (NYSE: FE) and Exelon (NYSE:EXC) haven't performed well. So what's driving American Electric Power's stock higher? 

1. Growth in sales and profit margins
In the first quarter, the company's revenue grew by nearly 22%, year over year. In comparison, FirstEnergy (NYSE: FE) expanded its revenue by 12%; Exelon's (NYSE: EXC) net revenue increased by 19%. These growth rates are still higher than the industry average: During the first quarter, the total retail sales of electricity grew by only 5%, year over year, according to the Energy Information Administration monthly report. But unlike FirstEnergy and Exelon, American Electric Power was able to improve its operating profit from 20% in the first quarter of 2013 to 22% in the past quarter. Moreover, the company increased its annual earnings per share guidance from an average of $3.3 to $3.45 -- another 5% gain compared to its initial estimate. The company also expanded its transmission capital investment by $200 million, which is another positive indicator for expected growth in its operations in the coming years. 

In the second quarter, the weather may have played a positive role again in driving its sales higher. This was the case back in the first quarter, in which the weather added $0.08 to its earnings per share. 

2. Paying the dividend from its profits
American Electric Power's dividend payment is made from its earnings without taking additional debt: Its EPS was $1.15 in the first quarter, and the dividend per share was $0.5. Conversely, FirstEnergy's EPS was $0.29 in the first quarter of 2014 but its dividend per share reached $0.36. The same goes for Exelon: Its earnings per share reached $0.1 while its dividend was $0.31 per share. American Electric Power is able to pay its dividend from its earnings because it has a high profit margin, which reached, as stated before, 22% in the first quarter. FirstEnergy's profitability was only 9.3%. 

The findings above also imply American Electric Power's growing debt is allocated toward capex, while FirstEnergy and Exelon raise their debt burdens only to keep their high dividend payment, which, at these current low earnings won't remain high for long. 

3. More room for growth
The main component of American Electric Power's fuel mix is coal -- nearly 60%. For a better comparison, I have taken two companies that also heavily rely on coal as their energy source. For Duke Energy (NYSE: DUK), coal accounts for 45% of its fuel mix. 57% of FirstEnergy's fuel mix is coal. 

Aep Mix

Source: Yahoo! finance and Damodaran's website.

As you can see, based on enterprise value to EBITDA ratios, American Electric Power has the lowest valuation. Further, the company's current value is even below the industry average. This makes the company's stock low with more room to grow compared to its peers. 

Foolish bottom line
American Electric Power is likely to keep recovering as it keeps presenting steady growth and continues to pay its dividend from its earnings and not from raising debt. 

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Lior Cohen 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers