Shares of power company AES Corporation (AES: 10.0825 +0.2925 +2.99%)shot up 11% on Wednesday after its board of directors approved a common stock buyback plan of $500 million. Under the program, AES will repurchase the company’s stock in lots through Dec 31, 2010, using a number of channels, which include open-market and private placements.The amount, timing or prices for the stock repurchase may vary based on market conditions and other factors. The board may modify, extend or terminate the repurchase program at any point of time.
The stock buyback announcement comes after a hiatus of almost two years. AES’ last share repurchase plan of $400 million was approved by its board on Aug 7, 2008. The program was valid for over a six-month period ending Feb 7, 2009.
Under the $400 million program, AES repurchased 10,691,267 shares at a total cost of $143 million plus commissions of $300,000 through Dec 31, 2008. This translated to an average of $13.41 per share including commissions. No shares were repurchased under the program subsequent to Dec 31, 2008, and the board’s authorization of the plan expired on Feb 7, 2009.
In the first quarter of fiscal 2010, AES reported adjusted earnings per share of 26 cents, a penny above the Zacks Consensus Estimate of 25 cents. The improvement was driven by improved operating performance at its generation business in the Philippines, higher volumes at its utilities in Brazil and favorable foreign currency exchange rates.
However, adjusted EPS for the quarter dipped 30% from the year-ago EPS of 37 cents, mainly due to a Northern Kazakhstan contract incentive payment of 12 cents per share recognized during the first quarter of 2009.
Consolidated revenue increased 26% to $4.1 billion. Factors contributing to the improvement were favorable foreign currency translation impact (particularly the Brazilian Real), higher tariff rates at its Latin American utilities, increased Latin American volumes, contributions from the company’s Cartagena business in Spain and improved operational performance in the Philippines.
AES’ cash and cash equivalents were $3.4 billion as of Mar 31, 2010, compared with $1.8 billion at fiscal yearend 2009. The company reported $684 million in cash from operating activities in the quarter, an increase of 92% compared with the corresponding period last year. Consolidated free cash flow increased $328 million to reach $528 million.
The company lowered its fiscal 2010 earnings guidance to a range of 90 cents to 95 cents per share from the previous range of $1.00 to $1.05. The Zacks Consensus Estimate currently stands at 96 cents for 2010, a penny above the high end of the guidance range, and at $1.16 for 2011. The guidance was based on 772 million diluted weighted average shares outstanding. As of Mar 31, 2010, AES had 795 million shares outstanding. The 2010 guidance has not factored in the current share buyback program.
AES remains focused on paying back its debt. Its debt-to-capitalization was 63.5% as of Mar 31, 2010, compared with 67% as of Dec 31, 2009. Compared to its competitors Duke Energy Corporation’s (DUK: 16.76 +0.04 +0.24%) 42.5% and Mirant Corporation’s (MIR: 11.10 -0.04 -0.36%) 35.0%, AES’s debt-to-capitalization is on the higher side.
However, AES is in a cash rich position compared to its peers. As of Mar 31, 2010, the company is armed with cash and cash equivalents of $3.4 billion compared with Duke Energy’s $1.1 billion and Mirant’s $2.1 billion. Given its cash position, AES has scope of further reducing its debt as well as repurchasing shares.
AES is a non-dividend paying stock in an industry (utilities and energy merchants), which has a high average dividend yield (Zacks industry average is 3.6%). Similar to AES, Mirant does not pay any dividend. However, Duke Energy has a dividend yield of 5.85% and it recently raised its annualized dividend from 96 cents to 98 cents.
We maintain our Underperform rating and Zacks Rank #4 (Sell) on AES given the significant international presence of its fossil fuel power plants in several emerging markets, exposing the company to both foreign currency and political risk. The company’s predominantly long-term contracts pre-empt any rate base growth in the near term for its regulated utilities.
Also, with lower electricity demand due to a tepid global economy, the fate of spot wholesale markets is not encouraging. We thus expect the shares of AES to underperform the broader equity markets in general and the utilities and merchant generators in particular.Arlington, Virginia-based AES is a global power company that owns and operates electric power generation and distribution businesses across 29 countries. The company’s operations are divided into three segments: Regulated Utilities, Contract Generation, and Competitive Supply.
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