AES Corp: This “Boring” Stock Just Raised Its Payout Again
Exciting Returns From a “Boring” Business
At first glance, AES Corp (NYSE:AES) does not seem to be anything special. The Arlington, Virginia-based power company provides electricity to 14 countries through its diverse portfolio of distribution businesses, as well as thermal and renewable generation facilities.
These days there are plenty of electric utility companies trading in the stock market, and AES doesn’t really stand out. However, despite being in a relatively boring business, it has delivered some very exciting returns.
Consider this: five years ago, the company was trading at $11.75 per share. Today, AES stock is priced at $19.11 per share. That’s a surge of 62.6%.
Better yet, other than delivering phenomenal share-price performance, the utility company has also rewarded investors with hefty dividend checks. And recently, management decided to raise the payout once again.
On December 9, the AES board of directors announced a quarterly dividend rate of $0.1433 per share, which represented a five percent increase from the company’s prior quarterly payment of $0.1365 per share. (Source: “AES Announces 5% Increase in Quarterly Dividend,” AES Corp, December 9, 2019.)
The new rate will come into effect in the first quarter of 2020, with the first payment being made on February 14 to shareholders of record as of January 31.
At AES stock’s current share price, the new dividend rate translates to an annual yield of three percent.
Of course, you can find plenty of stocks with higher yields. But here’s the thing: due to AES Corp’s strong dividend growth, investors who have held the company’s shares for a few years are now earning much higher yield on cost than when they bought the stock.
You see, AES reinstated its cash dividend policy in 2012 after a hiatus of almost 20 years, with an initial quarterly rate of $0.04 per share. Since then, the company has raised its per-share payout on seven different occasions, by a total of 258%. (Source: “Dividend History,” AES Corp, last accessed December 10, 2019.)
And based on what the company is doing right now, there should be plenty more dividend hikes on the way.
AES Corp Is a Top Dividend Growth Stock
In the third quarter of 2019, AES generated adjusted earnings of $0.48 per share, a 37% increase year-over-year. Moreover, the amount easily covered the company’s $0.1365-per-share dividend declared and paid in the quarter. (Source: “AES Delivers Strong Third Quarter Results and Accelerates Strategic Plans,” AES Corp, November 6, 2019.)
In the first nine months of this year, AES Corp’s adjusted earnings came in at $1.02 per share. Again, this was a sizable improvement from the $0.88 per share earned in the year-ago period. And considering that the company paid three quarterly dividends totaling $0.41 during this period, its payout ratio came out to a very conservative 40%, leaving a wide margin of safety.
Notably, over the past three years, the company has received upgraded credit ratings from Fitch Ratings, Inc., Moody’s Corporation, and S&P Global Ratings, reflecting the strengthening of its balance sheet. (Source: “The AES Corporation,” AES Corp, last accessed December 10, 2019.)
The best part is, AES is travelling on a growth path. For full-year 2019, the company is expected to earn an adjusted net income of $1.30 to $1.38 per share. At the midpoint, the number would be an eight-percent improvement from the $1.24 per share earned in 2018.
Looking further ahead, management has reaffirmed their average annual adjusted earnings-per-share growth rate target of seven percent to nine percent through 2022.
Furthermore, in the company’s latest earnings conference call, executive vice president and chief financial officer Gustavo Pimenta said, “Looking forward, subject to annual review by the board, we expect the dividend to grow 4% to 6% per year, in line with the industry average.” (Source: “The AES Corporation (AES) CEO Andrés Gluski on Q3 2019 Results – Earnings Call Transcript,” Seeking Alpha, November 6, 2019.)
Bottom Line on AES Stock
So, what we have here is an electric utility—which is known as a durable business model—that also has a solid dividend growth track record, a low payout ratio, and an increasing bottom line. Put those things together and it’s easy to see that AES Corp has everything it needs to continue its dividend hike streak.
AES stock is not exactly a high yielder in today’s market. But with safe and rising payouts, AES could still represent a solid dividend-growth opportunity.