Smart Dividend Portfolio Edition #38: Energizing Yield
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Dear Investor,
Welcome to the 38th edition of TipRanks’ Smart Dividend Portfolio & Newsletter.
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Market-Moving News: December 9, 2024
Stocks finished the week with mixed results, as the Dow Jones Industrial Average (DJIA) declined by 0.6% while the three other main benchmarks set new records. The S&P 500 (SPX) rose for the third straight week, adding 0.96% and sailing past most of Wall Street’s year-end targets. With 57 records this year, the broad large-cap index is on track for its best annual return since 2019. Meanwhile, the tech benchmarks Nasdaq Composite (NDAQ) and Nasdaq-100 (NDX) regained market leadership with weekly surges of 3.34% and 3.31%, respectively.
Data continues to point to a resilient economy and labor market, reflecting a robust backdrop for stock markets going forward. Consumption – the backbone of the U.S. economy, which drives about 70% of GDP – is robust, with healthy rates of spending growth supported by positive trends in real wage gains. The consumer sentiment index touched its highest level since April, reflecting positive economic expectations among U.S. households. As inflation is expected to continue trending downwards, while borrowing costs are set to keep on declining thanks to the Fed’s monetary easing, consumer strength is slated to continue well into 2025.
Moreover, U.S. economic growth for 2024 is forecast to come in at a healthy clip of about 3%, while the unemployment rate remains far below its long-term average. Last Friday’s jobs report confirmed the strength of the labor market, as hiring growth strongly rebounded from October’s weakness. Although the unemployment rate ticked slightly higher last month, it remains comfortably low.
Still, the increase in unemployment to 4.2% (from 4.1% last month) was seen as a sign of a moderation in labor market strength, supporting expectations for another interest-rate cut by the Federal Reserve later this month. However, there’s still one test for the economy to clear on the way to further easing – this week’s CPI inflation report. If the inflation comes in unchanged from last month’s 3.3% annualized rate as economists expect, markets may surge once again.
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This Week’s Quality Dividend Stock Idea
AES Corp. (AES) operates as a diversified power generation and utility company in the United States and internationally. It develops and operates power generation and energy storage projects around the world, focusing on traditional power generation alongside renewable energy sources like wind, solar, and battery storage.
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History of Power
Founded in 1981, AES began as a consulting firm and quickly expanded into power generation, pioneering the independent power producer model in the U.S. By the late 1980s, AES operated multiple cogeneration plants across the country. In 1991, the company went public and initiated international ventures, extending its operations to countries including the U.K., Argentina, and China.
Throughout the 1990s and early 2000s, AES diversified its portfolio through significant acquisitions, which facilitated its entry into the retail electricity market and helped it further expand its utility operations. At the same time, AES also strategically divested from non-core assets, aligning with its goal to generate $3.5 billion from asset sales by 2027.
Though roughly half of its revenues are derived from traditional power generation such as coal, natural gas, and oil, in recent years, AES has started focusing more on renewable energy. It has gone about acquiring several clean energy firms to build and enhance its Clean Energy division, which became a leading U.S. renewables platform. Today, AES operates a diversified portfolio of renewable energy sources such as wind, solar, and battery storage.
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Innovative Utilities
Despite operating within the traditional Utilities sector, AES has pioneered multiple innovations. In 2018, AES launched Fluence Energy in collaboration with Siemens, playing a pivotal role in advancing hybrid energy systems that combine renewable generation with battery storage. Fluence became an independent public company in 2021, but AES remains a significant stakeholder.
The AES Corporation has also formed strategic partnerships to advance next-generation long-duration energy storage technologies. It has secured funding from the U.S. Department of Energy to develop and scale hydrogen hub infrastructure, offering alternatives to conventional lithium ion batteries. In 2022, AES announced a joint venture with Air Products to construct a mega-scale hydrogen production facility in Texas. Furthering its hydrogen initiatives, in early 2024, AES entered into a supply agreement with Electric Hydrogen to procure advanced equipment for green hydrogen production, expanding its clean energy projects efficiently.
Beyond hydrogen innovation, AES has demonstrated leadership in operational technology. In 2018, it pioneered the use of advanced drone technology for power plant and grid infrastructure inspection, improving safety, reducing costs, and streamlining maintenance processes.
AES was also among the first to introduce corporate renewable power purchase agreements (PPAs), enabling global corporations like Google, Microsoft, and Amazon to meet clean energy commitments. These hyperscale companies require increasing amounts of energy to power AI data centers while striving to reduce their carbon footprints. According to McKinsey’s report, total U.S. data center electricity demand is expected to grow by 22% annually through 2030.
Furthermore, AES has implemented AI-driven energy platforms and virtual power plants (VPPs) to optimize distributed energy resources, such as solar, wind, and battery storage systems. By coordinating these resources, VPPs enhance grid stability, efficiency, and reliability, enabling clean energy to be used more effectively.
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Diversified Business Model
The AES Corporation has a market capitalization of $9.3 billion, classifying it as a mid-cap company. However, its annual revenue of $12.7 billion places it among the largest U.S. corporations and earns it a #319 ranking on the Fortune 500 list.
The AES Corporation operates through four primary segments, or strategic business units (SBUs): Energy Infrastructure, Utilities, Renewables, and New Energy Technologies. This structure allows AES to target specific markets efficiently, with each SBU contributing to the company’s overall goals.
The Energy Infrastructure SBU is the largest, contributing about 50% of annual revenue. It manages AES’s thermal generation assets, including natural gas, coal-fired plants, and LNG infrastructure. The Utilities SBU, responsible for nearly 30% of revenue, oversees regulated utility operations that provide stable electricity distribution to residential, commercial, and industrial customers.
The Renewables SBU has grown significantly, now contributing 21% of revenue through projects in solar, wind, hydroelectric, and energy storage. The New Energy Technologies SBU, though contributing less than 1%, focuses on energy innovations like Fluence’s energy storage systems and hydrogen ventures, which are pivotal for staying ahead in new energy trends.
AES’s business model balances traditional and renewable energy assets with innovation, enabling flexibility in shifting energy markets. For example, Renewables has benefited from clean energy subsidies under the Biden administration, while deregulation and reduced oversight, expected under Trump presidency, are projected to benefit Energy Infrastructure.
Geographically, AES operates in 15 countries across Latin America, Asia, and Europe, though the U.S. remains its largest market, contributing 35% of total revenue. Its global operations include a mix of thermal, renewable generation, and utility services, tailored to meet regional energy needs and regulations.
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Stable Finances
AES retains significant leverage on its balance sheet, which is common for utility companies due to the capital-intensive nature of their operations. Besides, in contrast to large, established producers, AES continues to grow its portfolio and international presence, heavily investing in infrastructure and expansion projects. However, according to credit-rating agencies, high leverage does not present an excessive level of risk, as reflected in AES’s investment-grade credit ratings: “BBB-” at Fitch and S&P and “Baa3” at Moody’s.
Particularly, Fitch praised the company’s large and diversified portfolio consisting of utilities, which provide regulated income stream and power-generating assets, whose revenues are anchored by long-term (over 13 years) contracts. According to Fitch, “AES’s diversified asset portfolio mitigates geopolitical adversity affecting a single power market or project.” Fitch also viewed the company’s increasing asset growth in the U.S. as a positive and commended its conservative capital allocation and financial management strategies.
AES Corporation’s revenues have grown at a CAGR of ~4% in the past three years, while its EPS has risen at a CAGR of over 23%. This significant EPS growth can be attributed to the aggressive expansion of its renewable energy portfolio, strategic non-core asset divestitures to free capital for growth projects, operational efficiency improvements, and booming power demand from data centers.
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Shareholder Returns In Focus
AES’s strong profitability supports its comprehensive capital allocation strategy that emphasizes strategic investments, prudent debt management, and liquidity preservation to support its growth and financial stability, along with shareholder compensation through dividend payments.
AES has increased its annual dividend for 12 consecutive years, which grants it the status of Dividend Contender. The latest such increase was announced on December 6th, with the raised payout effective in the first quarter of 2025.
The payout has grown at a CAGR of ~5% in the past five years, with analysts penciling in a similar rate of growth over the next several years. Although its dividend growth is modest, AES Corporation’s current dividend yield of 5.3% is almost double the Utilities sector average.
Beyond dividends, AES performs occasional share repurchases under its long-running buyback authorization. Since the share repurchase program was approved in 2015, the company repurchased approximately 7% of its outstanding stock, totaling $538 million.
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Undervalued Growth
AES’s stock has declined by ~28% over the past year due to several factors, including mixed quarterly results in Q3 and investor cautiousness towards renewable energy producers due to the coming political change. However, we view the selloff as overdone in light of the company’s strong fundamentals and improving operational efficiency, as well as the fact that it derives most of its revenues outside of renewables.
However, the strong decline in AES’s stock price has created a unique opportunity for income-oriented investors, as the stock is now trading at a discount of over 50% to the generally inexpensive Utilities sector. AES’s multiples also come at the bottom of the valuation scale for comparable industry peers. Moreover, based on future cash flows, the company appears to be undervalued by as much as 65%.
AES uses its cashflow from operations and asset sales to invest in projects that are expected to solidify its market position and produce stronger earnings growth. Despite some risks to revenue stemming from forex fluctuations and the potential loss of renewable energy tax credits, we believe that there is a significant long-term upside to the current share price for AES, benefiting the company’s shareholders beyond its substantial dividend yield. Thus, the average price target given by top Wall Street brokerages implies a ~60% upside in the next 12 months.
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Investing Takeaway
AES Corporation is a diversified global energy leader with operations in 15 countries, balancing traditional power generation and rapidly growing renewable energy assets. Leveraging innovative technologies like energy storage, hydrogen infrastructure, and virtual power plants, AES is well-positioned to meet booming energy demand, particularly from data centers. The company maintains stable revenues anchored by long-term contracts and a regulated utilities portfolio, providing reliable cash flows. With an industry-high dividend yield and 12 consecutive years of dividend growth, AES offers a compelling opportunity for income investors. Trading at historically low valuations, AES presents significant upside potential for long-term investors seeking growth and reliable dividends.
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Dividend Investor Portfolio
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Portfolio News
▣ Kroger Company (KR) reported its Q3 2024 earnings on December 5th. The company’s EPS was slightly above analysts’ consensus estimate, while sales missed due to the sale of Kroger Specialty Pharmacy during the quarter and to lower revenues from fuel sales, which was primarily the result of a lower average price per gallon versus Q3 2023. There was no significant change in analyst ratings following the release, with the stock rated a “Buy” by leading Wall Street brokerages. Moreover, J.P. Morgan, Wells Fargo, Evercore ISI, and Roth MKM raised their price targets on Kroger’s stock.
▣ The ex-dividend date for Automatic Data Processing (ADP) is December 13th.
▣ JPMorgan Chase & Co. (JPM) announced a collaboration with FactSet, which will lead to the integration of the latter’s performance, reporting, and portfolio analytics solutions with the bank’s data management platform. This partnership is set to provide asset managers and investors with advanced data management and analytics capabilities.
▣ Amgen (AMGN) announced a $1B expansion to establish a second drug substance manufacturing facility in North Carolina. This brings the company’s total planned investment in Holly Springs to more than $1.5B, building on its previously announced $550M commitment. The $1B facility will incorporate cutting-edge technologies and sustainable practices.
▣ Qualcomm (QCOM) saw its stock decline after Bloomberg reported that its modem chips used in iPhones are projected to be gradually replaced by Apple’s in-house modem systems, which are set to be released next spring. According to the report, the Apple expects to replace all iPhone cellular modem chips with internally-made tech by 2027.
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Recent Trades
None at the moment, although we are constantly evaluating stocks for a possible addition to the portfolio. Stay tuned.
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Portfolio Attributes
| Dividend Portfolio Yield |
Expected Dividend Growth | Expected Annual Income |
| 3.82% | +9.45% | $4,976.56 |
| Yield-on-Cost Adjusted, Weighted |
Average Analyst 12-Month Growth Outlook | 10K Per Stock at the Time of Purchase |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Yield on Cost | Annual DPS |
| Automatic Data Processing (ADP) | Dec 06, 2024 | Jan 01, 2025 | 2.24% | $5.60 |
| Allianz SE ADR (ALIZY) | May 09, 2025 | May 28, 2025 | 5.67% | $1.49 |
| Amgen (AMGN) | Feb 17, 2025 | Mar 07, 2025 | 3.09% | $9.00 |
| BlackRock (BLK) | Dec 08, 2024 | Dec 23, 2024 | 2.56% | $20.40 |
| Edison International (EIX) | Dec 27, 2024 | Jan 31, 2025 | 4.82% | $3.12 |
| EOG Resources (EOG) | Dec 13, 2024 | Dec 30, 2024 | 3.95% | $3.64 |
| IBM (IBM) | Nov 12, 2024 | Dec 10, 2024 | 3.13% | $6.68 |
| JPMorgan Chase (JPM) | Jan 06, 2025 | Jan 31, 2025 | 2.86% | $5.00 |
| Kroger (KR) | Feb 15, 2025 | Mar 01, 2025 | 2.82% | $1.28 |
| LyondellBasell (LYB) | Dec 02, 2024 | Dec 09, 2024 | 5.27% | $5.36 |
| Philip Morris (PM) | Dec 20, 2024 | Jan 10, 2025 | 6.06% | $5.40 |
| Qualcomm (QCOM) | Nov 29, 2024 | Dec 13, 2024 | 2.25% | $3.40 |
| VICI Properties (VICI) | Dec 20, 2024 | Jan 04, 2025 | 5.19% | $1.72 |
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
