Morningstar | AEP's 8% Dividend Hike a Strong Vote of Confidence in Long-Term Growth Outlook
We are reaffirming our $69 per share fair value estimate, narrow moat and stable moat trend ratings after American Electric Power reported third-quarter operating earnings of $1.26 per share, up sharply from $1.10 per share in the same year-ago period. Management increased and narrowed its 2018 earnings guidance to $3.88 to $3.98 per share, up from $3.75-$3.95 per share. We expect to raise our 2018 EPS estimate in line with management's new target, but don't expect it to materially change our fair value estimate.Management is quickly putting the disappointing outcome of the 2,000 MW Wind Catcher Energy Connection Project behind them after an unfavorable regulatory ruling caused AEP to abandon it. AEP previously put investor anxiety over its long-term growth prospects to rest last quarter by releasing its $6.3 billion 2021 capital expenditure outlook and reaffirming its 5% to 7% earnings growth.
AEP's board recently increased its dividend 8.1%, a strong vote of confidence for AEP's long-term earnings prospects. The new dividend rate puts AEP in the middle of its 60%-70% target payout ratio. The increase was above our expectations, and we forecast future dividend increases will be in line with earnings growth.
Favorable weather was part of the reason for AEP's strong quarter. Improving returns due to positive rate case outcomes also aided results for the quarter. Rate cases remain open in Oklahoma and West Virginia, wrapping up an important regulatory calendar for AEP. Regulated returns were 10.1% for the rolling 12 months, in line with our long-term 10% expectations.
At the upcoming annual Edison Electric Institute utility conference, we expect AEP to update investors on 2019 earnings guidance and financing details, its capital expenditure outlook, and its cash flow profile.
American Electric Power Company is a public utility holding company. The public utility subsidiaries of the company provide electric service, consisting of generation, transmission and distribution, on an integrated basis to their retail customers. The service areas of the company's public utility subsidiaries cover portions of the states of Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia and West Virginia. Transmission networks are interconnected with distribution facilities in the territories served. The company's service company subsidiary provides accounting, administrative, information systems, engineering, financial, legal, maintenance and other services.
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