Top Picks 2016: AES

01/21/2016 7:00 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

For his Top Pick for aggressive investors, Roger Conrad, editor of Conrad's Utility Investor, recommends both the common and the preferred shares of a global utility whose problems, he believes, have been greatly over-estimated.

Brazil's well-publicized political, economic, and weather woes have made association with the country toxic to investors in early 2016. The market, however, has greatly exaggerated the exposure faced by AES Corp. (AES).

And that should make for robust returns for the common stock in 2016 and solid safe income for AES 6.75% Preferred stock (AES.PC), which pays a quarterly dividend and converts October 15, 2029, to the greater of $50 per share in cash or 1.4216 shares of AES common stock. 

AES has promised annual dividend growth of 10% a year through 2018. And the company delivered for its upcoming February payment with a boost in the quarterly rate to 11 cents from 10 cents per share.

The key is executing some $7 billion in planned construction of utility and power projects, all but $400 million of which has been financed already.

The company brought a 1,300 megawatt plant on line in Vietnam last year six months ahead of schedule and under budget. Another 3,000 megawatts is scheduled to come on stream by the end of 2016—mostly in Indiana—with major hydro developments set for Chile and India.

AES’ other major growth engine is utility scale energy storage; energy storage is the key to greater deployment of intermittent power sources like solar, hydro, and wind.

Meanwhile, during a September analyst briefing, management addressed the 9% of earnings coming from Brazil. This consists of relatively small but controlling interests in two regulated utilities.

As a result, true Brazil exposure is vastly overstated in AES’ financial statements, a fact not picked up on by those who don’t take the time to understand the company.

AES still expects 15% annual free cash flow growth as it invests in contract generation and regulated utility rate base.

Close to an all time high yield and historic lows for every other valuation metric from p/e, sales and cash flow to book value, AES common is a buy up to $15. AES Preferred C is a buy below its call price of $50.

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