Top Picks 2021: America Electric Power Units (AEPPL)

01/13/2021 5:00 am EST

Focus: UTILITIES

Martin Fridson, CFA

Publisher, Income Securities Investor

American Electric Power Co. (AEP) ranks among the nation’s largest electric energy companies, observes Marty Fridson, a leading dividend specialist and editor of Forbes/Fridson Income Securities Investor.

The company services approximately 5.5 million customers across 200,000 square miles, covering Ohio. Michigan, Indiana, Kentucky, Tennessee, Virginia, West Virginia, Arkansas, Louisiana, Texas and Oklahoma.

The American Electric Power 6.125% Equity Units (AEPPL) consist of a purchase contract and a 1/20 undivided beneficial ownership interest in $1,000 principal amount of AEP’s 1.30% junior subordinated debentures due 2025.

The debentures are subject to reset and remarketing between May 11, 2023 and July 27, 2023. (See prospectus for details). The purchase contract requires the holder to purchase for $50.00 a variable number of AEP common, paying the holder an annual contract adjustment rate of 4.825%.

The stock purchase settlement rate is 0.5003 AEP common shares per unit if AEP common is equal to or greater than $99.95, and 0.6003 AEP common shares if the common is equal to or less than $83.29.

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For market prices between the aforementioned values, the settlement rate will be $50.00 divided by the common market value. Holders may settle the stock purchase contract at any time for 0.5003 AEP common shares for each purchase contract.

AEP reported solid 3Q 2020 adjusted net earnings of $722.3 million or $1.47 per share, edging out analysts’ $1.46 estimates.

Results benefited from improved operating efficiencies and a federal tax benefit from the CARES Act. Dividends from this issue are not qualified and are taxed as ordinary income. AEP’s convertible preferred is suitable for low- to medium-risk, tax-deferred portfolios. Buy up to $57 for a 5.37% current yield.

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