American Electric Power (NASDAQ:AEP) is one of the top electric utilities in the USA.
AEP has been in operation for over 100 years. The company has paid dividends since 1910. They have paid increasing dividends for the last 14 years. Usually, dividends are paid on or about the 10th day of March, June, September, and December of each year. The last 10 years dividend history, along with the stock market highs and lows for each of the periods, are listed below:
One striking observation is that the dividend is growing at a respectable rate: precisely 5.85% per annum over the last ten years and consistently over 5% every year.
Readers interested in a comparative study of selected peer electric utilities can look into my previous related article, Why I’m Considering Electric Utilities For My Portfolio by clicking over it. As concluding remarks in that article, I wrote in the first week of May,
All the utilities are showing stretched valuations as of now. But in reality, fair buy prices may or may not happen in the near future. Waiting with this type of projected price may or may not help me take any positions for my portfolio. But I am concerned about paying a high price as well.
Many of these companies have shed some market value. I notice AEP has corrected to a reasonable price level, and I would say it is at an attractive price for investment at the current market price of around $82.25.
Valuation based on historical dividend yield highs:
I usually evaluate companies in a few different ways. I look up its historical price movements, including highs and lows in each dividend pay period over the past 10 years.
However, one should note that greed and fear drive prices, and no one knows to what levels prices might drop in a fear-driven environment. The low price reached during the pandemic crisis may not be reached now since the investors have gained some experience from that. But the current fear could be something else. Hence, we can only use the above method as a reference point.
Valuation using the Dividend Discount Model:
In this method, a stock is valued as the sum of the expected future dividends discounted at an expected rate of return. If I want a 10% return on my investments, the stream of future dividends discounted at 10% would amount to $84.47 from AEP as against the current market price of $82.25. This is where I get the attraction of its price.
Valuation using dividend payback periods:
I would like to see how many years it will take to recover the money value of the current price in the form of future dividend streams. To arrive at the money value of future dividends, I assume the money value will go down at the rate of inflation. I will use 5% as an average inflation rate year over year into the future.
At a 5% inflation rate, the price paid for AEP today, at $82.25, can be recovered within the next 24 years as a dividend stream. In absolute terms, without any discounting, the dividends collected in the next 16 years will recover what I paid today. I generally use a NPV (net present value) of a maximum of 25 years of future dividends as a fair price. From AEP, I can expect $87.15 as dividend value in the next 25 years, which is approximately 6% over the current price.
Valuation based on the PE method:
A fair estimate of 15 PE is an age-old way of arriving at a fair price.
At 15 PE, the fair price will work out to $79.20 for AEP.
In this context, I would like to provide a clipping from the AEP investor relations site.
Besides the EPS guidance, the following clipping from their 2023 proxy statement shows their commitment:
Seeking Alpha’s dividend grades:
It can be seen that AEP’s current market price of $82.25 is within a fair range of my valuations. In fact, I did some buying at $81.50 per share on the last trading day. As usual, I only buy a part of my total target portfolio size for AEP, which is 2.5% of my total investible portfolio size. I will be adding more to the initial part as the prices go down. People who used to know me through my writings also know that I indulge in short-term trades when the stock is in a fair price range and that I build the ultimate long-term DGI portfolio quantity step by step. The short-term gains go a long way toward reducing my net cash flow invested in the same scrip.