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American Electric Power Earnings: AEP on Track to Meet Full-Year Results

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We are reaffirming our $97 per share fair value estimate after American Electric Power AEP reported third-quarter operating earnings of $1.77 per share, compared with $1.62 in the same year-ago period. The company narrowed its full-year guidance range to $5.24 to $5.34 from $5.19 to $5.39. Increasing our full-year estimate to within the narrowed range will not affect our fair value estimate.

AEP trades at a 21% discount to our fair value estimate, making it one of the cheapest U.S. utilities we cover. However, we think closing that valuation discount will take time as AEP works to narrow the gap between earned and allowed regulatory returns and executes on its capital investment plan while managing its balance sheet. AEP’s 4.6% dividend yield is a 70-basis-point premium to the group.

AEP recently closed the sale of its unregulated renewables business to IRG Acquisition Holdings, continuing management’s focus on regulated operations. AEP’s smaller sale of a joint venture solar portfolio, retail business, and noncore transmission joint venture continues. We don’t expect these divestures to have a material effect on our fair value. We continue to like AEP’s strategic focus on its core regulated businesses.

Execution of AEP’s regulatory schedule remains critical given its average earned allowed return on equity at its five key subsidiaries is just 8.7%, below its authorized ROE at all subsidiaries. While weather was a 40-basis-point drag, constructive regulatory outcomes will be needed to further narrow the gap. Overall, we view AEP’s regulatory constructiveness as average or below average across its subsidiaries.

The company’s 6% to 7% annual earnings growth target remains unchanged, in line with our expectation. Execution of the company’s $40 billion capital investment plan supports our earnings growth.

Third-quarter earnings benefited mainly from rate increases and capital investments, partially offset by higher interest costs and other smaller items.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Andrew Bischof

Strategist
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Andrew Bischof, CFA, CPA, is an equity strategist for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers regulated utilities, diversified utilities, and independent power producers.

Before joining Morningstar in 2011, Bischof was a senior treasury analyst for Mead Johnson Nutrition. Previously, he was a group audit officer for Bank of America in Chicago, and before that, an auditor for Ernst & Young.

Bischof holds a bachelor’s degree in business administration and accounting and a master’s degree in accounting from the University of Wisconsin. He also holds a master’s degree in business administration, with a concentration in finance, from Indiana University’s Kelley School of Business and the Chartered Financial Analyst® and Certified Public Accountant designations.

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