American Electric Power: Safety, dividend, and decent growth are hard to beat

Posted Nov 17th 2009 2:00PM by Joseph Lazzaro
Filed under: Stocks to Buy

U.S. electric power demand may be sluggish, due to the recession, but investors should view that as a temporary phenomenon. True, increased energy efficiency across the U.S. economy will be a trend for the next decade and beyond, but relatively low-cost electric power does not go out of style, which is why I'm reiterating my buy rating for American Electric Power Inc. (AEP), first recommended on May 4, 2009 at a price of $25.38.

If you bought AEP in May, you're up about 25%. AEP's above-average total return on equity story remains intact. Look for an increase in retail electric demand in F2010, and that fact, combined with a decline in operating/maintenance costs, and little impact from greenhouse gas legislation until about 2018 or 2020, translates into a bargain stock at a P/E of 12.

A $1.64 annual dividend adds to the positive story. The First Call FY2009/FY2010 EPS estimates for AEP are $2.94 to $3.07.

Technically, American Electric stock chart has encountered 52-week resistance at/near $33. AEP may also correct heading into December on year-end profit-taking by short-term players. Otherwise, AEP's chart looks good.

Stock Analysis: American Electric Power Inc. is a moderate-risk stock. If you've already purchased the company's shares, hold them. If not, consider buying a 50% position in AEP now; then buy another 25% in one month, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 75% of your AEP position before December 2009. Sell/Stop Loss if you were to buy shares in this company: $12.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: AEP, American Electric Power