It’s time to be defensive.
The brief truce in the US-China trade war is looking shaky, Brexit remains as much of a mess as ever and interest rates have been testing higher levels while volatility, as measured by the VIX, remains elevated.
Given the uncertainties in the global markets right now, it’s no wonder that many investors are rotating into defensive stocks in an effort to protect their portfolios.
There is little doubt that, as an investor, you would have heard about defensive and cyclical stocks (or sectors). Not surprisingly, they are labelled as such because of the nature of their price movements and their performance in the market cycle.
The utilities sector – considered a defensive sector – has been one of the best performing sectors of the S&P500 in recent months, holding up comparatively well as global markets retreated in October.
This shouldn’t come as a big surprise as defensive stocks are most likely to outperform during volatile periods in the market when the cyclicals are under pressure.
Utilities may not be the most glamorous stocks or the most sought-after sector, but they have shown their reliability and dependability over the years, particularly during market volatility.
One of the defensive stocks in this sector that has delivered positive results to investors is American Electric Power Company (NYSE: AEP)
Who is American Electric Power?
It may not be a household name like Facebook or Apple, but American Electric Power is one of the key electricity utility companies in the US.
It delivers electricity to more than five million customers in 11 states in the USA with both direct retail and wholesale customers.
AEP ranks among the largest generators of electricity in America. It also owns the nation’s largest electricity transmission system, a nearly 39,000-mile (63,000km) network.
The company operates and services seven major geographical areas including Ohio, Texas, Indiana, Kentucky, Oklahoma and Arkansas.
Positive financial results
Let’s have a look at some recent numbers from this energy company.
- Most recent financial reporting season showed earnings of $US577.6 million, or $US1.17 per share, compared with $US544.7 million, or $US1.11 per share, a year earlier.
- Adjusted profit came in at $US1.26 a share, compared with $US1.10 in the prior-year period.
- Revenue rose to $US4.3 billion from $US4.1 billion in the same quarter last year, which is above analysts’ estimates of $US4.2 billion.
The Ohio-based company has also announced it will raise its quarterly dividend by 8.1% to 67 cents a share from 62 cents a share. At current prices, the new annual dividend rate would imply a dividend yield 3.64%.
According to the company’s chief executive Nicholas K. Akins, AEP’s strong performance was driven by “strategic investments in our core businesses to improve service to customers, combined with very favourable weather”.
As expected, after the company reported positive financial numbers, trading volumes in the stock increased with market capitalisation pushing above $US39 billion.
Looking at the company’s share price movement – there was a correction in prices after the stock hit its previous all-time high last December. However, since mid-June the stock has staged a strong revival of the underlying upward trend. Gains of 19% have seen the stock break to new all-time highs above $US78.
Majority of the market analysts following AEP are bullish on the stock price. Even the most recent Reuters survey of analysts showed that 14 of the 19 analysts recommend a BUY on AEP while five analysts recommend a HOLD.
AEP’s positive performance is comforting for investors despite recent reports that the electricity and power sector faces new challenges amid growing demand for clean and renewable energy.
In a 2017 report on the electricity and utilities sector, consulting firm PWC said that in the industrialised economies this sector, particularly the traditional power companies, will continue to face a revenue slow down. Two major factors are being blamed for this trend: declining end-user demand for “dirty” electricity and rising demand for new power and utilities offering.
In search of renewable energy
But this trend may bode well for AEP as the company is at the forefront of clean and renewable energy generation in the US.
In fact, AEP had filed for a long-term renewable energy increase target in Ohio in September this year. In its submission to the Public Utilities Commission of Ohio, AEP said: “This is our first step in demonstrating the need for at least 900 Megawatts of new renewable energy, which would more than double the clean energy in a state that is dominated by coal and gas electricity production.”
While AEP has a long history of traditional electricity and power generation, it recognises the need and consumer demand for clean and renewable energy sources.
Given the company’s proactive advocacy and investment in renewable energy, it looks like it will continue to generate support both from electricity consumers and investors alike.