American Electric Power (NYSE:AEP) reported earnings last week, beating sales estimates and matching earnings expectations. With a bigger distribution for investors around the corner, let's take a look to see if this dividend stock has what it takes to pull sustainable profits for your portfolio.

Number crunching
American Electric's Q1 sales clocked in at $3.8 billion, slightly above analysts' $3.78 billion expectations and 4.8% above Q1 2012's revenue . In a year of falling sales for most utilities, American's top line increase is a welcome sign for income investors.

Bottom-line numbers also kept up with Mr. Market's predictions, with $0.80 adjusted EPS. For a peck of perspective, AEP's sales have bumped up a slight 3.5% over the past five years. In the same time, diluted EPS has dipped 24%.

AEP Revenue Annual data by YCharts


A position to transition
To understand American Electric today, we have to head back to 2011 and look forward to 2015. Two years ago, Ohio announced it would deregulate its utilities, and two years from now marks the date when markets will go fully competitive in the Buckeye State. FirstEnergy (NYSE:FE) has been busy grabbing American Electric customers, knocking $11 million off AEP's Q1 earnings despite colder weather and successful rate proceedings.

As the dividend stock revamps its regulated operations, its generation portfolio is heading back to coal country. AEP is dropping natural gas in favor of coal, a move that should keep costs competitive in the near future. Rising natural gas prices are expected to increase coal demand 7.8% in the next year, a movement that neatly mirrors AEP's 9% year-to-date increase in coal generation.

As utilities such as Atlantic Power (NYSE:AT) add on to their natural gas capacity, rising costs could cut into profits in the quarters to come. Atlantic currently relies on natural gas for 58% of its generation capacity, and although the utility is also adding on to its renewables, more natural gas is not what the dividend doctor ordered.

AEP relies on coal for about 66% of its generating capacity, comparable to TECO Energy's (UNKNOWN:TE.DL) 61% coal capacity. TECO takes its coal cravings a step further with vertical integration, pulling 9 million tons of solid black gold annually from its Appalachian mines.

Dividend for the win?
Even as AEP recovers from its Ohio deregulation and focuses on coal, the company announced a 4.3% dividend increase earlier last week. Investors are heading back to Mr. Market after the Great Recession, but utilities are less confident about their own investments. With low expectations for electricity demand growth, dividend stocks are upping their payouts to keep their books from becoming bloated. Southern (NYSE:SO) also announced a higher distribution two weeks ago, but American Electric seems to be in the most sustainable situation to live up to its status as a dividend stock.

AEP Cash Div. Payout Ratio TTM data by YCharts


Foolish bottom line
American Electric's in a transition mode, and its short-term coal capitalization doesn't spell out long-term success. But the company's management is making smart moves, and its books are some of the most balanced in the business. I'm holding off on bull-versus-bear until I see where AEP focuses its future, but this most recent quarter keeps the utility in the running for any dividend stock portfolio.