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Is American Electric Power Poised for Long-Term Growth?

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Utilities ahead

The long steep rally of utilities came to an end after investors offloaded the stock based on troubling valuations. The pace of the Fed’s projected interest rate (TLT) hike is expected to drive the way ahead for US utility stocks in the next few months.

Notably, as the end of the year has approached, there has been increasingly aggressive commentary from the Fed regarding a rate hike, and this commentary has begun the current weakness in utilities.

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US utilities (XLU) have experienced an earnings drag due to unfavorable weather conditions during the past few quarters. Degree days indicate favorable weather in the third and fourth quarter of 2016, which may support utilities’ earnings. Let’s look now at the price targets of utilities amid these challenges.

AEP’s price targets

According to Wall Street analyst estimates, American Electric Power (AEP) has a price target of $71.1, as compared to its current market price of $64.80. This target implies a possible upside of 11% in one year.

Of the 23 analysts tracking American Electric Power, nine recommend it as a “hold,” while 14 recommend it as a “buy.” None of the analysts recommend it as a “sell” as of September 16, 2016.

American Electric Power’s CEO, Nicholas Akins, is taking active steps to turn the company into a regulated utility. Divesting its Merchant Generation segment will separate AEP’s relatively less stable unregulated segment from the rest of the company. AEP’s dividends are expected to grow in line with its earnings.

Meanwhile, AEP’s earnings growth is projected to be between 4% and 6% over the next couple of years. The proceeds from the recent sale of its Ohio and Indiana merchant capacity are expected to go to the transmission infrastructure, which fetches a higher return on equity.

For ongoing analysis of this sector, keep checking in with Market Realist’s Power Utilities page.

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