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What Sets AEP’s Dividends Apart?

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American Electric Power Company (AEP) declared a quarterly dividend of $0.70 per share in October. These dividends will be paid on December 12. The recent dividends were an increase of more than 4% compared to last quarter’s dividends of $0.67 per share. AEP’s dividend has a notable track record. Let’s dive a bit deeper.

AEP’s long dividend history

AEP has paid a quarterly dividend for the last 437 consecutive quarters, starting in July 1910. The long payment history suggests a stable and reliable dividend profile. American Electric Power Company operates in 11 states and serves approximately 5.4 million customers.

AEP stock is up more than 20% so far this year, largely tracking utilities at large. The utilities stole the focus this year amid broader market volatility. These defensives have had a solid run, mainly due to their stable dividends. While the markets might continue to swing on trade war developments, utilities will likely be in focus.

Fair yield

AEP is expected to pay total dividends of $2.71 per share in 2019, which represents a dividend yield of 3%. Broader utilities are also trading at a dividend yield of 3%, which is a premium exceeding 100 basis points compared to the broader markets and Treasury yields.

In comparison, Duke Energy (DUK) and Dominion Energy (D) yield around 4.3% and 4.6%, respectively. Duke Energy also has a long dividend payment history. It has paid a cash dividend for 93 consecutive years.

Respectively, Duke Energy and Dominion Energy stocks are up almost 3% and 16% so far this year. Both these stocks underperformed their peers at large. To learn more about leaders among these defensives, read Utility Stocks: Analyzing the Top Gainers in 2019

AEP’s dividend growth

Along with a yield, what matters for investors is the company’s dividend growth. Utilities are generally slow-growing companies, offer a slow dividend growth. In the case of AEP, it increased dividends by almost 6% compounded annually in the last five years.

Utilities at large increased dividends by approximately 4% in the same period. Peers Duke Energy and Dominion Energy increased their dividends by 3% and 9%, respectively, in the last five years. Analysts expect close to a 5% dividend increase from AEP for the next few years, which is in line with the industry average.

AEP aims to grow its EPS by 5%–7% per year in the long term, which seems sufficient to fuel its dividend growth. Also, its large regulated operations facilitate stable earnings growth.

The company aims for a payout ratio of 65%, which is in line with the industry average. Utilities generally have a higher payout ratio, as they pay a big portion of their earnings in the form of dividends to their shareholders. In 2019, AEP’s payout is expected to be around 65% based on the management’s EPS guidance. Its five-year average payout ratio was around 72%.

AEP: Analyst price targets

American Electric Power stock offers an upside potential of 7% based on analysts’ mean target price of $97.70. It traded at $90.90 as of December 3. Among the 17 analysts currently tracking AEP, four recommended a “strong buy,” another four recommended a “buy,” and nine analysts recommended a “hold.” Notably, AEP has not received a “sell” rating in more than a year.

Utility stocks have remained in focus this year as investors switched to defensive stocks. However, they have become more expensive after the rally so far. To learn about how they are placed for the future, please read Utility Stocks: Is There Any Steam Left in These Defensives?

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