AES is in stage #2. But it is a weak uptrend, though. Over a longer period of time, the stock is more in stage #3 than #2. Since 2018 it saw a volatile move up, then crash in 2020, sharp recovery and now a zig-zag trading. It makes sense to wait for the bottoms of this choppy move to buy. We are currently in the lower portion of the channel and the stock is undervalued. AES is a boring dividend paying stock. It was a laggard for the year so far and if utilities pick up, the stock may go higher.

 

 

AES revenue was dropping since 2014 and bottomed (at least it seems like it today) in 2020. Now it is growing again. The stock seemed to be following the revenue trend:

 

 

Free cash flow is erratic and recently declining. Will it impact dividends? Let’s review it…

 

 

The chart below indicates that the company has enough operating cashflow to cover the dividend.

 

 

But operating cash flow may not be enough to cover the dividends. Let’s take a look at the free cash flow again:

 

 

The chart, once again, shows how erratic the cash flow is, and that the company does not always have enough free cash. It may put the dividend under stress. So, let’s take a look at the overall cash in hand.

 

 

From the chart above, we can see that the company is loaded up with debt. In raising interest rate environment, this can be a big problem. It only has $2b in cash and $22b in debt. And the debt ir rising.

This is quite typical for the utility sector and AES is not that bad when compared to its peers.
Another feature of the utility companies in a regulated market is high Capex expenses. AES has fairly high Capex:

 

 

AES had rising shares outstanding since 1990 diluting investors. It peaked in 2010 and after that the company started buybacks. It was reducing shares until 2015 when they stopped. The ratio was flat since then with occasional second offerings.

 

 

The company has paid dividends since 1992 and kept raising it every year. A 1-year dividend growth is 5%, a 5-year growth is also 5% making it a good dividend growth stock:

 

 

Based on the operating earnings and expectations, AES is undervalued. But the financial health of the company is a concern.

 

 

 

The stock is trailing S&P500 with only slightly better growth. It exceeded SPX in dividends. Should we be buying this stock given the financial mess we could see above?

Well, you need to do your own DD but looking at the past (which of course guarantees nothing) the company had this messy financial for years and yet it managed to pay the dividends and increase them every year. I think it is safe to buy this stock, but I wouldn’t go crazy on it.
 

The stock is now MODERATE BUY
 

This post was published in our newsletter to our subscribers on Sunday, July 30th, 2023. If you want to learn more about our stock technical analysis subscribe to our weekly newsletter.