Why This Utility Makes Sense Now for Power Profits

This utility provides income, growth and safety in a low-yield and dangerous world.
By Thomas Scarlett ,

The heart of your retirement portfolio should be companies that provide the necessities of human life, such as food, shelter and energy. In the modern world, one could add information to that list. But by owning a piece of companies that make things people need to buy, you will have the power to guarantee your returns out to the farthest time horizon.

Speaking of power, electric utilities have long been prized by investors for the reliable income they provide, but you shouldn't overlook their capacity to provide growth as well. As the international experts continue to ponder the implications of Brexit and the uncertainties of the Chinese economy, U.S. utilities can provide a reliable stream of both growth and income.

An excellent choice in this sector is Ohio-based American Electric Power (AEP) - Get Report . It's one of the largest electric utilities in the United States, serving nearly 5.4 million customers in 11 states. American Electric Power has an electricity transmission network that extends more than 40,000 miles in all -- the largest such system in the country. It includes more 765-kilovolt extra-high voltage transmission lines than all the other U.S. transmission systems combined.

American Electric Power is a holding in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. See how Cramer rates the stock here. Want to be alerted before Cramer buys or sells AEP? Learn more now.

The stock's yield is consistently above 3% and currently checks in at 3.22%. That makes it an attractive investment already, but the company also offer substantial long-term growth potential.

Some analysts pronounced the firm's last earnings report underwhelming because earnings per share came in at $1.02, compared with $1.29 per share in first-quarter 2015. Much of that decline was due to the unusually warm winter in several of the company's markets. The size and diversity of its customer base mean that it can take advantage of improving U.S. economic prospects without an inordinate amount of market risk.

Meanwhile, the stock's price-earnings ratio is under 18, cheap for an established company like this one.

KeyBanc Capital recently raised its price target for American Electric Power, citing its ability "to outperform in a risk-off market as increased market uncertainty drives a flight to the safety and yield of U.S.-centric utilities." It added that such companies have "minimal market exposure as well as attractive capital opportunities and generally supportive regulation."

Utilities often get bad publicity when they suffer outages after bad storms or other disasters. While hurricane season has been pretty mild so far this year, American Electric Power is constantly looking for ways to improve the consistency of its power transmission.

American Electric Power recently teamed up with several other utilities, including Duke Energy and Edison International, to launch Grid Assurance, an independent company providing transmission sparing solutions for critical electric transmission equipment. The idea is to give utility companies faster access to long-lead time critical equipment and repair services necessary to recover from catastrophic events that could clobber the nation's power grid.

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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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