AES Corp. Stays Neutral - Analyst Blog

On Jul 11, 2013, we maintain our long-term recommendation on The AES Corp. (AES) − a power company engaged in electricity generation and distribution businesses − at Neutral. The company currently retains a Zacks Rank #2 (Buy).

Why the Reiteration?

The company's presence across 5 continents in 25 countries represents a highly-diversified earnings base. Geographic disparity in its target markets has resulted in a portfolio that is well-positioned for capitalizing on regional differences in power prices and weather-driven demand. This insulates the company from specific risks in any single region or country.

Again, AES Corp.'s large presence in the developing markets of Asia and Latin America puts it in a profitable position compared to its North America-focused peers. Steady economic growth and power demand in the emerging markets offset to a great extent the erosion in profitability in North America. The company is investing extensively for capacity expansion in the power hungry regions of Latin America and Asia.

The company's expense reduction program, aimed at curtailing general and administrative (G&A) costs, is expected to lead to bottom-line growth. AES Corp. has already achieved 62% of its three-year target in the first year. During the first quarter, the company reduced G&A costs by $26 million and remains on track to meet $145 million in annual cost reductions in 2014.

However, AES Corp.'s focus on long-term supply contracts exposes the company to commodity price risk. The company would be unable to pass on any escalation in prices of coal and natural gas to its customers.

Again, the company was a non-dividend paying stock since 1993 and only recently (Oct 2012) initiated the payment of dividends to its common shareholders. The intended annual payout of 16 cents comes with a yield of only 1.27%, in sharp contrast to its peers (utilities and energy merchants), which have a high industry average dividend yield (Zacks industry averag! e: 3.5%). This makes it a weak investment driver.

Other Stocks to Consider

There are other companies in the sector that appear more promising. These include Zacks Ranked #1 (Strong Buy) Companhia Paranaense de Energia (ELP) and Integrys Energy Group, Inc. (TEG), and Zacks Ranked #2 (Buy) Calpine Corp. (CPN).