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American Electric Stays Neutral

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We have maintained our Neutral recommendation on American Electric Power Co., Inc. (AEP - Free Report) on Oct 09, 2013.

Why the Reiteration?

American Electric Power has a stable earnings base of approximately 5 million customers spread over 11 states. This diversification provides stability to the revenue stream and insulates the company from adverse regulatory decisions and the detrimental effects of lower sales in any particular service area.

In order to enlarge its stable earnings base, American Electric Power has focused its capital expenditure on its regulated business. Furthermore, the company’s geographically diversified nature allows it to avail transmission opportunities with better returns, compared to its single-state utility peers.

The selective focus on transmission expansion will allow the company to attain its 4% – 6% long-term EPS growth target. This long-term growth target is expected to be driven by capital allocation, regulatory recoveries, performance improvements that benefit customers, operations and bottom-line performance. The Zacks Consensus Estimate for the third quarter 2013 is $1.08, up a projected 5.88% year over year.

Though the second quarter results were adversely impacted by higher operations and maintenance expenses (O&M), the company is on track to curb O&M. The company’s cost-control initiatives, particularly overhead cost, are expected to reap benefits in the second half of 2013. It expects O&M expenses to be flat year over year in 2013.

The company’s three plants are under lean process implementation that calls for shedding waste in order to reduce costs and increase competitiveness. The company has saved $5 million to $10 million per plant in this analysis. In 2014, the company plans to put six to eight plants under this process. Altogether, it plans to bring 15 to 20 plants under this process.

With a strong liquidity position of $3,447 million, American Electric Power remains well positioned. The company has been returning wealth to its shareholders via dividends since Jul 2010. The company pays a quarterly dividend of $0.49 per share that represents a high dividend yield of 4.49%.

Despite these positives, tepid economies in a number of its service states, weak residential, commercial and industrial sales and its predominantly fossil fuel based generation assets may restrict opportunities for future performance.

Other Stocks to Consider

American Electric Power Co. presently retains a Zacks Rank #3 (Hold). Stocks that are worth considering in the space are Alliant Energy Corporation (LNT - Free Report) , Cleco Corporation and Brookfield Infrastructure Partners L.P. (BIP - Free Report) , all with a Zacks Rank #2 (Buy).

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