New Trade for December 16th, 2021

Stocks ticked higher this morning, looking to add to yesterday’s gains after the Fed brought clarity to some of the question marks surrounding the timetable for upcoming policy changes.

Investors seemed relieved yesterday as Fed chair Powell outlined plans for the tapering of asset purchases and rate hikes to come.  The Fed announced it will aggressively reduce asset purchases in January and buy just $60 billion in bonds, down from $90 billion in December, and accelerate the reduction further in 2022.  Interest rates, which were held steady for now, will likely be subject to three hikes coming in 2022, with two more in 2023 and 2024. 

“Economic developments and changes in the outlook warrant this evolution of monetary policy, which will continue to provide appropriate support for the economy,” Chairman Powell said following the FOMC policy meeting.  

Companies that have done well in previous rate-hike cycles led the way up in early trading.  

Today we’ll take a look at a diversified energy company with a successful history during rate-hike cycles that speaks for itself.  The stock comes equipped with an 83% Buy rating from the pros that cover it, plus a sizable 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, interest rates were increased 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.  

Before 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 83% Buy rating among the analysts offering recommendations.  A median 12-month consensus price target of $30.50 represents a 26% upside from the last price.  

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.  If you need another reason to consider AES, a quick review of its dividend history should inspire.  The company has steadily increased its dividend over the past ten years while maintaining a sustainable payout ratio of around 70% throughout.  AES raised their dividend 5% earlier this month to $0.158 per share or 2.55%.