With nothing more than a passing glance, the stock looks like a solid buy. Shares are priced at less than 8 times their 12-month earnings, while their forward-looking dividend yield stands at 6.6%. Its revenue and dividend payments have also been firmly -- even if not explosively -- growing for years now, thanks to one of the world's most reliable recent growth drivers. That's the ever-rising need for energy, and in particular, demand driven by the proliferation of power-hungry data centers.
And yet, shares of electricity wholesaler AES Corporation (AES -0.83%) continue their erratic bearish trek, reaching a new multiyear low in May of this year to now stand at less than half their late-2022 peak value. Not even recent chatter of an acquisition did much to turn this trend around.
What gives? The market's just pricing in the company's biggest risk -- one that may force AES's proverbial hand sooner than later. Indeed, it could start to happen by the end of this year.
Fortunately, it's not something ambiguous or arbitrary. Investors will be able to see it happening on the company's balance sheet, and even in news headlines.
But first things first.
What's AES Corporation?
AES generates electricity. It's not a utility company per se, however. It sells most of what it produces to actual utility providers, or increasingly, directly to institutional-level users like Microsoft and Meta Platforms that need massive amounts of cost-effective electricity for their artificial intelligence (AI) data centers. The majority of its power comes from renewable energy sources too, satisfying current societal preferences, and future regulatory requirements.
The company wasn't built from the ground up to be an ultra-modern energy provider, though. Twenty years ago, AES made its foray into the wind energy arena with a company called SeaWest, kicking off what would be a major paradigm shift toward an all-renewables portfolio. Last year, it did $12.3 billion worth of business, turning $700 million of it into net income. Not bad.
The only problem? The company took on an uncomfortable amount of debt in its effort to get out in front of the shift to green energy. As of the most recent look, AES is servicing over $30 billion in long-term obligations (versus a market cap of just under $10 billion) that are costing it on the order of $1.4 billion in interest payments per year. Its relative debt load is one of the very highest in the utilities industry, in fact. That's why most investors continue to balk at this seemingly bargain-priced stock -- the capitalization situation as it stands isn't indefinitely sustainable.
A strategy with no margin for error
Don't panic if you're a fan, follower, or shareholder: The aggressive, capital-intensive strategy has mostly been working. The company has not only remained profitable since turning up the heat in 2022, but has (again, mostly) managed to grow its bottom line in step with revenue.
Buying growth by acquiring existing, operational companies rather than producing growth organically, however, isn't cheap. Although price tags for its purchases are rarely disclosed, there's usually a premium price for a proven project.
Perhaps the bigger concern here, though, is the fact that AES is now shedding existing assets and stakes as a means of curbing costs and coming up with some cash before much of its outstanding debt comes due. Last year, for instance, it opted to sell its 47% stake in renewable energy producer AES Brasil to utility company Auren Energia. Later last year, it sold a 30% stake in AES Ohio to investment group CDPQ.
Image source: Getty Images.
Such fundraising isn't damning in and of itself, to be clear. AES can refinance or even cover its immediately maturing debt well enough. But these actions are out of character for this particular company, which had been aggressively acquiring similar assets. It's a subtle sign that management may be worried about liquidity, or is starting to worry that its projects aren't producing quite enough cash flow compared to their cost.
In this vein, after years of growth, the company's rolling backlog of power purchase agreements it's expected to satisfy appears to have stagnated, sliding from last year's peak of 12.7 gigawatts to only 11.7 gigawatts as of the first quarter of 2025.
What to watch
So what exactly is it that investors need to watch with AES for the remainder of this year? Two (related) things.
On a qualitative basis, you'll want to see the company improve its capitalization situation rather than allow it to deteriorate. And this progress could manifest in more than one way.
AES may start seeing more cash flow from projects that have already been paid for, as an example, but it could also simply sell existing assets at a good price and pay down its debt. One could even make the argument that the company might be able to invest in new projects and properties that produce an immediately strong return on the investment. Just remember: Like buying and selling houses, cars, and even stocks, acquisitions tend to cost a little more than they seemingly should, while divestitures never quite fetch the price you'd like.
Quantitatively, you don't want to see The AES Corporation's credit rating worsen.
It's not terrible right now, for the record. Fitch Ratings currently rates the company's unsecured bonds at BBB-. That's still considered healthy enough, but it's the lowest-possible score that's still considered investment grade. Any worse, and AES's debt moves into the so-called "junk" category that makes it more difficult (as well as more expensive) to refinance existing and/or maturing debt.
This isn't a prediction, though. It's just a possibility to acknowledge.
With all that being said, perhaps the best-possible outcome for this stock from here is the recently rumored buyout coming to fruition. Although the buyer might be taking on a great deal of debt for not a lot of revenue-bearing assets, to the right suitor with deep-enough pockets, AES's scale and presence within the renewables arena might be worth it. Navigating its own debt reduction and asset optimization, conversely, could prove difficult, continuing to weigh on the stock.
Just bear in mind that the acquisition rumor is just that -- a rumor. That alone is no reason to own any stock.
