This utility moves smartly for smoother results. Is it a purchase?

AEP (AEP 0.43%)Also known as American Electric Power, is one of the nation’s largest utilities, operating regulated utilities in 11 states. It’s just a significant change to the way we run our business, but it will help us produce smoother results. Here’s what you need to know before you decide to buy this high-yield dividend stock.

AEP just sold its business

In February 2023, AEP agreed to sell 1.365 gigawatts worth of renewable power assets across 14 large-scale projects. The sale was completed last August and generated after-tax proceeds of approximately $1.2 billion. But money wasn’t the important factor here.

Image source: Getty Images.

All assets sold were unregulated. Long-term, fee-based contracts are standard for assets like this, but AEP still had to compete with other providers. This means that the company has to deal with market rates and balance them with quality issues surrounding the customer. Compared to regulated assets, regulated assets involve significant risks.

A regulated asset is a portion of a utility that is granted exclusive rights in the territory it serves. In return, the utility must get rates and investment plans approved by the government. This tends to lead to slow and steady growth, but generally protects the company from market risks. One of the most important aspects of operating a regulated utility is providing reliable power to customers. Regulators are generally willing to approve rates and investments that ensure that happens, but they tend to place a cap on how much a utility can profit from the process. This is why utilities are often called “widow and orphan stocks” because they are considered safe enough to be owned by risk-averse investors.

Essentially, what AEP has done by selling its unregulated clean energy assets is become a fully regulated utility. However, we have not given up on clean energy.

AEP is focused on a safer, clean energy future.

The utility industry is transitioning from dirtier fuels to cleaner fuels. So coal power plants are being shut down and solar and wind power plants are being built. AEP’s move to sell off its unregulated clean energy assets appears to run counter to this trend, which has been true to some extent. We have sold a significant amount of clean energy capacity. But the goal is still to go green in other ways.

For example, AEP plans to add 17 gigawatts of new clean energy resource opportunities over the next 10 years. The goal is to achieve “net zero” by 2045. And the current capital budget includes $9 billion for regulated renewable power investments. The company is still moving toward a much cleaner future.

AEP data from YCharts

The biggest difference is that all of the $9 billion it plans to spend will be on assets receiving government-approved rates. This effectively guarantees significant profits for the company. This is a completely different story with unregulated assets, where the market determines interest rates. Essentially, it doesn’t really matter what happens on Wall Street or in the economy. AEP’s plans and financial returns for these projects are likely to be very similar to what was expected because regulators have set the terms.

Slow and steady storytelling leads to much more tangible results than before. Now add in AEP’s quite attractive 4.3% dividend yield. Also note that the dividend was increased by 6% in the fourth quarter of 2023. This is a nice improvement and an attractive rate of return, especially considering that the average utility is yielding about 3.5% using: Vanguard Utility Index ETF (VPU 0.39%) By proxy.

AEP may not excite you, but being boring isn’t a bad thing.

AEP, which has moved out of the unregulated clean energy space, has sold off what some saw as its growth engine. While that may be true, it allows utilities to focus on more predictable and regulated assets, which should translate into more consistent financial performance over time. For conservative, income-focused investors, it’s probably a net gain. Add in above-average returns (near 10-year highs), and you might want to add this regulated utility to your portfolio today.