Will AGL Energy Ltd (ASX: AGL) shares or American Electric Power Company (NYSE: AEP) shares have more energy in 2019? Alex Douglas from Monex Securities takes a look at these two blue chips.


When tech stocks led the US share market to a drop of around 10% in October, one sector held up much better than the others: Utilities.

This is not totally surprising as Utilities are regarded as one of the defensive sectors – Those that are less affected by market cycles and near-term volatility.

Unfortunately, here in Australia, we’ve seen some of the utilities/electricity companies caught in the drama of confusing government policies and consumer demand for lower energy prices.

For example, AGL Energy has seen its share price in decline since hitting highs in April 2017. Over the subsequent 20 months, the share price of AGL has dropped by as much as 38% to probe below $18, with prices still languishing below $20 in mid-December.

Origin Energy Ltd (ASX: ORG) is another player in the electricity sector. After heavy falls in 2015, the stock managed to stage a solid recovery from early 2016 through until mid-2018. However, since failing to hold onto gains above $10 in July, the stock has since fallen back to close at a low of $6.48 at the end of November. Despite lifting from this low in early December, the stock remains a long way from resuming an upward trend.

The share prices of both of these energy companies are now massively down from previous highs and there appears to be that lingering pressure.

However, many analysts remain positive and are recommending Buy or Hold on some of the big electricity companies.

To NEG or not to NEG

There’s no doubt that the ever-changing government policies around National Energy Guarantee (NEG), renewable energy sources, power generation are adding pressure to the industry.

To quote the Wholesale electricity market performance report of December 2018 by the Australian Energy Regulator: “Emissions policy instability, in particular, was identified as a key impediment to investment in the NEM (National Electricity Market). Interventions to address other energy policy objectives, such as reliability and affordability were also cited as factors stifling investment by creating uncertainty.”

At the same time, consumers are demanding lower energy bills.

Utilities on the Defensive

Despite the challenges being faced by energy/electricity companies (especially in Australia), the Utilities sector should still play an important role in an investor’s portfolio.

This is because Utilities are considered defensive stocks. They are most likely to outperform during volatile periods in the market when stocks in the more cyclical sectors 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.

If you are looking for a comparative stock outside of Australia that fits into this defensive group, American Electric Power Company (NYSE: AEP) may tick the box for you.

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 U.S. 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 (63,000 km) 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 US$577.6 million, or US $1.17 per share, compared with US $544.7 million, or US $1.11 per share, a year earlier.
  • Adjusted profit came in at US $1.26 a share, compared with US $1.10 in the prior-year period
  • Revenue rose to US$4.3 billion from US$4.1 billion in the year-ago quarter, which is slightly above analysts’ estimates of US$4.2 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 of 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 US$39 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, probing the US$80 level.

Bullish outlook

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 5 analysts recommend a Hold.

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.

This article was written by Alex Douglas, Managing Director of Monex Securities Australia (AFSL: 363 972), part of the Monex Group Inc.

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