Short Circuit at AEP?

By Gene G. Marcial

American Electric Power (AEP ), operating in 11 states, has been a live wire lately. Its stock, which hit 48 in April, plunged to 15 in mid-October, prompting the company to reduce its exposure to speculative energy-trading markets. Since then, it has rebounded to nearly 30--in part because of the Bush plan to eliminate taxes on dividends.

American pays a hefty $2.40 a share annually, a yield of almost 9%. But a few pros shorting the stock say AEP is facing a liquidity squeeze and is having difficulty supporting its huge payout. Some analysts warn that AEP may have to cut the dividend--which would hammer the stock. On Dec. 11, Moody's Investors Service (MCO ) lowered AEP's credit rating and placed its commercial paper on review. AEP insists it won't touch the dividend. But the Moody's review "could result in a further downgrade," warns Steven Fleishman of Merrill Lynch, who is neutral on the stock. Merrill has done banking for AEP in the past 12 months. Moody's was concerned about AEP's declining earnings and cash flow and the high dividend ratio of 86%.

One pro who is short AEP at 25--and who reaped big profits in shorting Enron (ENRNQ ) and WorldCom (WCOEQ ) in 2001--sees AEP hitting a new low of 14 in a year. He says AEP is holding off action on the dividend so it can do a secondary equity offering at the current price. But he warns that new equity sales would mean increased payouts on the new shares--which will worsen cash flow. Daniel Ford of Lehman Brothers (LEH ), who rates the stock "equal weight," says AEP needs to cut the dividend to alleviate Moody's concerns. Ford sees earnings of $2.80 a share in 2003, down from an estimated $2.85 in 2002 and $3.38 in 2001. AEP says it has no plans at this time to announce a secondary offering.

Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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