American Electric Power Company, Inc. (NASDAQ: AEP) is the largest electric utility company in the United States, headquartered in Columbus, Ohio. In this thesis, I will mainly analyze AEP’s Q2 2022 results and its future growth drivers. I will also analyze the risks run by the company and its valuation at current price levels. I believe AEP is a growing company with a stable dividend yield. I am giving AEP a buy rating after considering all of these factors.
AEP is an electric utility company providing electricity in 11 states, serving more than 5 million customers. It is one of the largest electricity supply companies in the United States. The company generates, transmits and distributes electricity to direct consumers as well as to other electricity companies. It has approximately 224,000 circuit miles of distribution lines to supply electricity to individual households and commercial properties. The company has nearly 22,500 MW of regulated power generation capacity. It generates electricity through various methods, some of which are environmentally friendly sources. AEP primarily generates electricity through nuclear, hydro, solar, wind, coal and natural gas sources and methods. The company’s great advantage in the market is the vertical integration of its generation, transmission and distribution facilities. This integration ensures that activities run smoothly with limited dependence on external sources.
Q2 2022 results
AEP reported excellent results for the second quarter of 2022, beating market revenue estimates by 16.5%. Reported EPS was in line with market expectations. The company also reaffirmed FY22 revenue and EPS guidance. AEP also plans to grow its renewable energy portfolio to 50% by 2030 and is in talks to acquire several renewable energy assets for reach this goal. It has seen strong demand and expects steady demand throughout FY22.
AEP reported revenue from vertically integrated utilities of $2.6 billion, a 16.8% increase over second-quarter 2021 revenue of $2.2 billion. According to my analysis, the increase in electricity prices, complemented by increased demand, was the main driver of income. Revenue from transmission and distribution utilities was $1.3 billion, a 19% increase from $1.09 billion in the same quarter a year earlier. Rising prices were the main contributing factor to the increase in revenue. The company reported total revenue of $4.6 billion, an increase of 21% compared to $3.8 billion in the corresponding quarter of the previous fiscal year. I believe the company will maintain revenue in FY22 and FY23 by increasing production capacity and expanding into other states. The company reported total expenses of $3.6 billion, up from $3 billion in the second quarter of 2021, an increase of 20%. According to my analysis, the increase in raw material prices and the cost of labor were the main factors for the increase in expenses. It reported non-GAAP net income of $617.7 million, compared to $589.5 million in the second quarter of 2021, an increase of 5%. The increase could be even higher if the one-time equity loss of $165 million from unconsolidated subsidiaries is not taken into account. Non-GAAP EPS was reported at $1.20. The company also announced a dividend of $0.78 payable on September 9, 2022. This gives us an annualized dividend yield of 3.11% at the current price level.
Overall, the company posted strong results in the second quarter of 2022 with considerable improvement across all segments. The company reaffirmed its non-GAAP EPS estimates for FY22 in the range of $4.87 to $5.07. I think the company’s EPS estimates are conservative and my estimate is that FY22 EPS could be between $5.10 and $5.25. The company is constantly trying to expand its business and increase its renewable energy portfolio, which I believe will be crucial for the growth of the company in the years to come.
Nicholas K. Akins, AEP President, President and CEO, said,
We are making significant progress on our plan to responsibly transform our generation fleet as we strive to add approximately 16,000 megawatts of regulated renewable generation by 2030 and achieve our goal of net zero emissions by 2050 Appalachian Power recently received approval to own 409 megawatts of wind and solar, and SWEPCO filed regulatory approval in May to purchase three renewable energy projects totaling 999 megawatts. We are currently researching new wind and solar proposals in several states and continue to add generation in accordance with our integrated resource plans to better meet the future energy needs of our customers. We are also making substantial progress on our planned investments of nearly $25 billion in transmission and distribution from 2022 to 2026, as we develop a modern, reliable and resilient energy network that will benefit our customers. Our Transmission Holding Co.’s net plant increased by $1.2 billion, or 10.5%, since June 2021.
Key risk factor
Changes in technology and regulatory policies: The majority of AEP’s electricity is generated at large central facilities. Its transmission and distribution infrastructure is distributed to customers, usually under an exclusive franchise. Compared to dispersed generation using new or existing technologies and technical advances such as fuel cells and microturbines, this strategy achieves economies of scale and generally reduces costs. Other technologies, such as light-emitting diodes (LEDs), make electricity more efficient, reducing demand. Spending on emerging technologies is falling to a point where it is competitive with some power generation and distribution plants due to changes in regulatory rules and advances in energy storage technologies like batteries, wind turbines and cells photovoltaic solar panels. These advances may threaten AEP’s ability to compete to maintain reasonably affordable and reliable operations, fair regulatory frameworks, and cost-effective customer programs and services. Additionally, if alternative generation resources are introduced into the available generation supply and mandated by regulation or legislation may be commercially viable, this may displace units of generation with higher marginal cost, lowering the price at which market players sell their electricity. This is why I believe that technological advancements and regulatory policies can be a major challenge for the future growth of the company.
The company is currently trading at $98.46 with a market capitalization of $50.91 billion. At the current valuation, the company is trading at a PE multiple of 20.77x. The company posted strong quarterly results and is seeing increased demand. After taking these two factors into account, I estimated EPS at $5.25 for FY22, which gives us the main PE multiple of 18.75x. Due to growing demand, I believe the company could be trading at a higher PE multiple of 24.5x, giving the target price of $128.6, which is a 30.6% upside from at the current level. The company has a dividend yield of 3.11% at current price levels, which is another attractive factor for investors looking for a safe and stable dividend yield. According to Seeking Alpha’s dividend rating, the company’s dividend payout is safe, growing, and consistent as it has A- safe, B+ growing, and A+ consistent.
AEP released strong second quarter 2022 results and reaffirmed its guidance for fiscal year 2022. I believe the company will beat market estimates in the coming quarters with increased demand and rising power prices . The company is currently trading at an attractive P/E multiple of 18.75x, which may be an ideal entry point for investors. The company also boasts an attractive annualized dividend yield of 3.11%. After considering all these factors, I give AEP a buy rating.