Morningstar

AEP Positioned to Benefit Under Infrastructure Plan

We continue to view American Electric Power as an attractive long-term holding.

We are reaffirming our $89 fair value estimate for American Electric Power after President Joe Biden released a $2 trillion infrastructure plan. After trading in deep 4-star territory, AEP now trades at a 5% discount to our fair value estimate as of early April. We continue to view AEP as an attractive long-term holding.

The $2 trillion, eight-year plan includes $100 billion to modernize the electric grid while also supporting the administration's goal of achieving 100% carbon-free electricity by 2035. The package would provide an investment tax credit to encourage at least 20 gigawatts of transmission to support the integration of renewable generation. The package would also create a Grid Deployment Authority at the Department of Energy, with the aim of using existing rights of way to support transmission line development. Permitting new transmission projects has been an obstacle.

AEP is the largest transmission and distribution operator in the United States and would be a big beneficiary of any additional federal incentives for transmission development. Its predominant business is transmission and distribution. AEP will direct over 80% of its five-year $37 billion capital plan to this segment, most centered on asset replacement and modernization. The segment is a key driver of our 6% earnings growth estimate through 2025, the midpoint of management's 5%-7% target. Additional transmission capital opportunities could lead to earnings growth closer to 7% and a modest increase in our fair value estimate.

To pay for the infrastructure plan, the corporate tax rate would increase to 28%. Similar to its peers, regulators across AEP's service territory would allow for higher taxes to be passed along to customers, limiting the financial impact of any corporate tax increase. AEP successfully worked with regulators to pass along corporate tax savings when Donald Trump's administration lowered the corporate rate.

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About the Author

Andrew Bischof, CFA

Strategist
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Andrew Bischof, CFA, CPA, is a strategist, AM Resources, for Morningstar*. He covers electric, gas and water utilities. He conducts comprehensive research and analysis on his covered companies to provide insights into investment opportunities. He assesses financial statements, competitive advantages, and economic indicators to determine a stock’s intrinsic value. He is a five-time Morningstar Outstanding Research Achievement award winner, which recognizes thought leadership and equity research quality as voted on by senior management.

Before joining Morningstar in 2011, Bischof worked in treasury for Mead Johnson Nutrition. Previously, He was a group audit officer for Bank of America in Chicago, and before that, an auditor for Ernst & Young.

Bischof holds a bachelor’s degree in business administration and accounting and a master’s degree in accounting from the University of Wisconsin. He also holds a master’s degree in business administration, with a concentration in finance, from Indiana University’s Kelley School of Business. Additionally, he holds the Chartered Financial Analyst® and Certified Public Accountant designations.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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