The AES Corporation is an energy company. The Company operates through four segments: Renewables, Utilities, Energy Infrastructure, and New Energy Technologies. This is an electric utility with renewal play. The company is getting rid of its coal plants and getting out of Brazil, etc and investing in Renewables. IN the short-term, especially next year the earnings are going to be impacted by this transition and new projects will come online on 26 and 27. So some short-term pain and a better long-term growth.
The stock has sold off, especially since the Earnings. Below is a 10 year chart… Not looking great at all. However, I think they are closer to the bottom.
The chart is not telling the decline is over, however, I have opened a 2.5% position. Generally I start bit slow and build, but I have some covered call’s I am going to close and looking at trimming some of the tech position. The current dividend yield is 5%+, so you get paid to wait.
BAC/ Merrill Lynch has underperform rating on this name. It is good to understand the bear thesis. Here are some of their concerns.
Execution risk, getting permits and interconnect issues
Planning to triple its renewals, i.e., 40-45 GW by 2027, only 3.6 GW in 2024, so significant ramp-up in the next 3 years or backend loaded growth
This will lead to non-linear growth, taking hit next year and then growing in 26 and 27
Policy issues
Inflation Reduction Act changes, we all know incoming administration doesn’t believe in renewables or climate change.
Other tax credits could be at risk
Financing issues
Selling fossil assets, as PPA (power purchasing agreement) nearing may result in not able to sell at attractive valuation; AES plans to raise $3.5 B
These are fully depreciated assets, thus earning higher margins, being replaced by newer assets
Potential for impairment charges for asset write-downs, if shutdown or sold at lower prices
There is $1.5 B funding gap, which could impact investment grade
AES can issue equity to keep the IG, but that would be dilution
Also, funding issues could limit dividend growth
Higher leverage means stock multiples could suffer
My comments. The report has listed the concerns clearly and very well. They are projecting $2.05 $2.11 $2.16 EPS for 25, 26, 27. This is below consensus and the lowest projection amongst the analysts. So, let us assume they are able to $2.2 and get 9x PE and $20 share price by Dec 2027, that would give 15.75% CAGR return and add to that 5.5% dividend would give you 20% CAGR return.
I am not dismissing the risks listed, there are additional risks emerging with the current administration picking international fights, or other policy fights, and there is a potential for higher interest costs, etc. OTOH, the company may slow the transition or elongate it on the positive side. Any stock rally could provide an opportunity to sell some shares and reduce the financing risks.
Not able to find any news except CEG buying Calpine and CEG going down 10%. A $0.176 dividend coming up on 1/31 (ex-date, and paid on 2/14). Now the dividend yield is 5.44%.
In the past I have got burned on buying $VZ for dividend. caveat emptor
Look at this image, the US utilities, specifically electric utilities, and regulators living in no growth world for 2 decades. The oncoming demand surge requires capacity build, and regulators and consumers has to be prepared for changes (read it as possible price hike).
Separately, the data center demand is not going to be what utilities and even the hyperscalers were projecting!!! Today, most of the HPC’s are thinking of nuclear because they are going to have one big datacenter, but with scaling hitting walls, the technology is evolving to test-time computing. Discussing that would be too technical. But this is going to move the compute demand to closer to the edge, that means the data centers will move closer to the end-user, in other words more smaller data centers. Also, given the long gestation period for nuclear, data centers are going to pivot to renewable and other power sources.
Of course now I am suffering from commitment bias, but I think AES with its renewables focus and able to quickly come online will have a good growth ahead.
