Last update on 2024-06-27

American Electric Power (AEP) - Dividend Analysis (Final Score: 5/8)

Comprehensive analysis of American Electric Power's (AEP) dividend performance using an 8-criteria scoring system. Final Score: 5/8.

Short Analysis - Dividend Score: 5

We're running American Electric Power (AEP) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield is a financial ratio that shows how much a company pays out in dividends each year relative to its stock price. A higher dividend yield can be attractive for investors looking for regular income.

American Electric Power (AEP) currently has a dividend yield of 4.1492%, which is notably higher than the industry average of 3.12%. Over the past 20 years, AEP's dividend yield has generally trended above the industry average with a few fluctuations. In 2003, the yield was significantly higher at 5.4081%, but it dropped to around 3.34% by 2014. Despite these fluctuations, AEP has maintained a relatively high yield compared to its industry peers. This trend is appealing for income-focused investors, but it's also important to consider the company's ability to sustain and grow dividends over time. Given AEP's recent yield surpasses the industry average once again, it is a positive sign for potential investors, reflecting not just a strong historical trend but also current strength in delivering shareholder returns.

Average annual Growth Rate higher than 5% in the last 20 years?

The Dividend Growth Rate over the past 20 years indicates the ability of the company to increase its dividend payouts consistently. A rate higher than 5% often suggests strong financial health and good performance.

Over the past 20 years, American Electric Power (AEP) has had an average dividend growth rate of approximately 2.09%. This falls short of the 5% benchmark, which might indicate a slower growth in dividend payouts. Certain years, like 2003 and 2004, experienced notable negative growth rates of -31.25% and -15.15%, respectively, adversely impacting the average growth rate. Despite periods of positive growth such as 7.11% in 2019 and 8.19% in 2011, the average remains below 5%. This trend could be concerning for investors looking for robust and consistent dividend growth, potentially reflecting periods of financial difficulty or strategic reinvestment decisions within the company.

Average annual Payout Ratio lower than 65% in the last 20 years?

Average payout ratio lower than 65% over the last 20 years.

Over the analysis period from 2003 to 2023, American Electric Power (AEP) shows an average payout ratio of approximately 92.02%. This figure is notably higher than the ideal threshold of 65%, suggesting that the company has been paying out a significant portion of its earnings as dividends. Examining year-by-year data, in 9 instances, the payout ratio exceeded 65%, punctuated by troubling peaks like in 2003 (577.53%) and 2016 (182.70%). Such a high average payout ratio relative to the standard can indicate that the company may be over-distributing its earnings, which could raise concerns regarding the sustainability of its dividend policy. This excessive payout can strain resources necessary for reinvestments, raising the financial risk profile of AEP.

Dividends Well Covered by Earnings?

Earnings per share (EPS) reflect a company's net profit divided by the number of outstanding shares. It indicates how much money a company makes for each share of its stock. When dividends are well covered by earnings, it means that the company has sufficient profit to pay its shareholders, ensuring the sustainability of dividend payments. EPS is crucial for assessing the financial health and performance of a company and its ability to maintain or increase dividends.

Reviewing American Electric Power's (AEP) Earnings Per Share (EPS) and Dividend Per Share (DPS) over the last two decades, we observe that the dividend coverage ratio fluctuates. Ideally, a ratio above 1 indicates dividends are well-covered by earnings. From 2003 to 2023, EPS varied greatly, showing inconsistency, especially in 2003 where the ratio was extraordinarily high (5.77) due to low EPS. In subsequent years, the ratios improved but remained below 1, which is less ideal. More recent years showed better performance: 2021's and 2022's ratios were closer to 1 (0.70) and even though the 2023 estimate shows a ratio of 0.79, it remains below the ideal threshold. Therefore, while there is some progress, the overall trend points to dividends not being robustly covered by earnings, which could be a concern for long-term dividend sustainability.

Dividends Well Covered by Cash Flow?

Dividends covered by cash flow indicate the company’s ability to pay distributions to its shareholders using its free cash flow. It is important because relying solely on profit can be misleading as it often includes non-cash items which don't reflect the turbulence in the company’s operational cash generation. Maintaining a good cash flow coverage ensures a firm’s dividends are sustainable in the long run. If this ratio is above 1, dividends are covered by the available free cash flow.

The coverage trend of American Electric Power (AEP) dividends by free cash flow from 2003 to 2023 demonstrates a concerning pattern. The cash flow coverage ratio swung widely, dipping negative multiple times indicating dividends were being paid out of reserves or through debt in these instances. For instance, in 2023, the coverage ratio stood at approximately -0.71, adhering to negative trends observed frequently in historic data (i.e., in 2005 at -1.05, 2006 at -0.74, and periodically more recently in 2019, 2020, and 2021). Such a trend reveals that AEP struggled to cover its dividend pay-outs from its free cash flow in numerous years and often relied on alternate funding avenues. A consistent positive ratio close to or above 1 is advisable for financial stability indicating insufficiently productive cash flow management for dividend funding.

Stable Dividends Since the Company Began Paying Dividends?

Stable dividends over the past 20 years are crucial for income-seeking investors as they provide reliable income and demonstrate company's financial stability.

Analyzing the dividend per share data for AEP from 2003 to 2023, we observe a consistent increase, with no drop exceeding 20% in any given year. The lowest point was from 2003 to 2004 when the dividend per share dropped from $1.65 to $1.4, an approximately 15.15% decrease. Thus, based on the data, AEP meets the criterion for stable dividends over the past 20 years, which is favorable for income-seeking investors.

Dividends Paid for Over 25 Years?

The criterion checks if American Electric Power (AEP) has consistently paid dividends for over 25 years. Consistent dividend payments are a sign of financial stability and a company’s commitment to returning value to shareholders.

From the given data, American Electric Power (AEP) has paid dividends every year from 1998 to 2023, which spans 26 years. The dividends per share have shown a general uptrend, increasing from $2.40 in 1998 to $3.37 in 2023. This trend is beneficial as it indicates AEP's commitment to maintaining and increasing shareholder value. The sharp decline in 2003 to $1.65, however, followed by subsequent increases through the years, suggests a period of financial reorganization or strategic adjustment which eventually benefited the shareholders. Overall, the company displays a strong track record of consistent dividend payments, which is favorable for both current and potential investors.

Reliable Stock Repurchases Over the Past 20 Years?

Reliable stock repurchases indicate a company's commitment to returning value to shareholders and can signal confidence in the company's future earnings.

Over the past 20 years, American Electric Power (AEP) shows a fluctuating number of shares outstanding, with notable increases in some years. For instance, the number of shares jumped from approximately 385 million in 2003 to over 518 million in 2023. The years identified as having reliable repurchases are 2005 and 2019, contrasting with an overall upward trend in share count. The average share repurchase frequency is only 1.546 times in 20 years, which suggests that stock repurchases are not a common practice for AEP. This could be viewed negatively from a shareholder’s perspective, as the minimal buyback activity may reflect the company's preference for retaining capital or investing in other areas rather than returning it to shareholders. Therefore, this trend appears unfavorable in terms of reliance on stock repurchases as a method of returning value to shareholders.