Daily Stock Pick: August 29th, 2022

Stocks slipped this morning, adding to last week’s steep losses as market optimism faded that the Federal Reserve will be able to tame inflation without causing a significant economic slowdown.  Hawkish comments from Fed Chair Jerome Powell at the Jackson Hole Economic Symposium indicated that the central bank would continue aggressively raising interest rates until inflation is under control.

Not all stocks are underperforming in the face of Fed hawkishness.  Today we’ll look at a diversified energy company that’s been building on strong momentum and outperforming the market.  This stock has a successful history during rate-hike cycles that speaks for itself and comes equipped with an 80% Buy rating from the pros that cover it, plus an attractive dividend payout.  

Headquartered in Arlington, VA, the AES Corporation (AES) is one of the world’s leading power companies, generating and distributing power in 15 countries.  The company’s diverse portfolio of thermal and renewable generation facilities and distribution businesses spans the Americas, Europe, the Middle East, and Asia.  The stock has a history of outperforming the market following rate hikes.    

The Fed’s most recent rate hike cycle began in 2015, during a time when inflation had fallen below the central bank’s 2% target, and interest rates were increased by 0.25% to 0.5%.  In the six months following the hike, the S&P 500 saw a series of ups and downs but finished the period with a modest 0.3% gain.  AES, however, managed to stack on almost 19% during the six months following the most recent rate hike.  

Prior to that, Federal Reserve Chairman Ben Bernanke and his colleagues initiated an unprecedented two-year campaign in June 2004 to keep a lid on inflation following the recession of the early 2000s with a 0.25% hike to 1.25%.  Six months after the initial rate hike, the S&P 500 had gained 6.2%, while AES stacked on an impressive 37%.    

Will history repeat this time around?  There’s no telling, but the pros on Wall Street seem to see that potential.  The stock garners an 80% Buy rating among the analysts offering recommendations.  A median 12-month consensus price target of $30.00 represents a 17% upside from the last price.  Over the past month, the AES share price has gained 15% and could build on that momentum in the coming months as the Fed continues its tightening path.    

Most recently, Goldman Sachs analyst Insoo Kin initiated coverage of the stock with a Buy rating and a $30 price target citing the company’s potential to take advantage of the material clean energy investment pipeline.  The analyst predicts an approximately 8% EPS CAGR through 2025 that she sees as underappreciated at current valuations.  A quick review of their dividend history should provide inspiration if you need another reason to consider AES.  The company has steadily increased its dividend over the past ten years while maintaining a sustainable payout ratio of around 70%.  AES raised its dividend 5% in February to $0.158 per share or 2.55%. 

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