# Exploring American Electric Power (AEP) for Secure Investment Returns

Many investors turn to Benjamin Graham's so-called “Graham number” to calculate the fair price of a stock. The Graham number is √(22.5 * 5 year average earnings per share * book value per share), which for American Electric Power gives us a fair price of \$68.85. In comparison, the stock’s market price is \$86.1 per share. American Electric Power’s current market price is -20.0% below its Graham number, which implies that there is upside potential -- even for a conservative investors who require a significant margin of safety.

The Graham number is often used in isolation, but in fact it is only one part of a check list for choosing defensive stocks that he laid out in Chapter 14 of The Intelligent Investor. The analysis requires us to look at the following fundamentals of American Electric Power:

Sales Revenue Should Be No Less Than \$500 million

For American Electric Power, average sales revenue over the last 4 years has been \$33.41 Billion, so in the context of the Graham analysis the stock has impressive sales revenue. Originally the threshold was \$100 million, but since the book was published in the 1970s it's necessary to adjust the figure for inflation.

Current Assets Should Be at Least Twice Current Liabilities

We calculate American Electric Power's current ratio by dividing its total current assets of \$6.74 Billion by its total current liabilities of \$11.28 Billion. Current assets refer to company assets that can be transferred into cash within one year, such as accounts receivable, inventory, and liquid financial instruments. Current liabilities, on the other hand, refer to those that will come due within one year. American Electric Power’s current liabilities are actually greater than its current assets, since its current ratio is only 0.6.

The Company’s Long-term Debt Should Not Exceed its Net Current Assets

This means that its ratio of debt to net current assets should be 1 or less. Since American Electric Power’s debt ratio is -0.6, the company has much more liabilities than current assets because its long term debt to net current asset ratio is -0.6. We calculate American Electric Power’s debt to net current assets ratio by dividing its total long term of debt of \$39.49 Billion by its current assets minus total liabilities of \$69.7 Billion.

The Stock Should Have a Positive Level of Retained Earnings Over Several Years

American Electric Power had good record of retained earnings with an average of \$8.19 Billion. Retained earnings are the sum of the current and previous reporting periods' net asset amounts, minus all dividend payments. It's a similar metric to free cash flow, with the difference that retained earnings are accounted for on an accrual basis.

There Should Be a Record of Uninterrupted Dividend Payments Over the Last 20 Years

American Electric Power has offered a regular dividend since at least 2009. The company has returned an average dividend yield of 3.4% over the last five years.

A Minimum Increase of at Least One-third in Earnings per Share (EPS) Over the Past 10 Years

To determine American Electric Power Company's EPS growth over time, we will average out its EPS for 2007, 2008, and 2009, which were \$2.72, \$3.42, and \$0.49 respectively. This gives us an average of \$2.21 for the period of 2007 to 2009. Next, we compare this value with the average EPS reported in 2021, 2022, and 2023, which were \$4.96, \$4.49, and \$4.24, for an average of \$4.56. Now we see that American Electric Power Company's EPS growth was 106.33% during this period, which satisfies Ben Graham's requirement.

American Electric Power meets most of Benjamin Graham's criteria for an undervalued stock because in addition to trading around fair value, it has:

• impressive sales revenue
• not enough current assets to cover current liabilities because its current ratio is 0.6
• much more liabilities than current assets because its long term debt to net current asset ratio is -0.6
• good record of retained earnings
• a solid record of dividends
• positive EPS growth
The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.