New tariffs on Canada and Mexico, as well as increased tariffs on China, took effect on Tuesday, March 4, delivering on threats from President Donald Trump.
Canada was the first to retaliate, announcing counter-tariffs on U.S. goods. China, which “firmly rejected” the tariffs, also announced tariffs on some U.S. goods.
Overall, a full-blown trade war now looks set to begin, with the countries impacted by Trump’s tariffs announcing countermeasures. The escalating trade war is taking a toll on U.S. stocks, and after the meltdown on March 3, the S&P 500 Index ($SPX) has turned negative for the year.
Notably, U.S. stocks crashed in the second half of 2018 amid the escalating trade war in Trump’s first term. This time around, Trump started imposing tariffs right at the beginning of his second term, and their repercussions are being felt in broader markets.
Given the U.S.’s reliance on imports – something Trump is seeking to address with the trade actions – the tariffs are expected to cause a lot of disruption and add additional costs for many sectors, such as the automotive industry. Unsurprisingly, share prices of companies that rely heavily on imports and have global supply chains are in the red this year. This includes the likes of Ford (F), General Motors (GM), and HP (HPQ).
At least in the short term, the tariffs are borne by consumers and U.S. companies importing these goods. As the witty Warren Buffett perfectly said, “Over time, [tariffs] are a tax on goods. I mean, the Tooth Fairy doesn’t pay ’em!"
Amid the uncertain macroeconomic environment and trade war fears, investors can find solace in safer bets. I believe American Electric Power (AEP) looks like a good stock to buy now, especially for investors looking for safe dividend stocks.
3 Reasons to Buy AEP Stock Now
American Electric is among the largest electricity producers in the U.S. and boasts the largest transmission network, spanning 40,000 miles. I find AEP stock a good buy for the following three reasons.
- Regulated Utility Trading at Reasonable Valuations: AEP is a regulated entity whose earnings are quite predictable and linear. Last year, it posted operating earnings per share (EPS) of $5.62, which it expects to rise to between $5.75 and $5.95 in 2025. The stock trades at 18.3x its expected earnings over the next 12 months, and the valuation multiples are similar to their 10-year averages.
- Data Center and AI Opportunity: There has been a renewed interest in power companies amid the growing demand for data centers. While the artificial intelligence (AI)-driven euphoria in markets has subsided, it does not look like a boom-bust story, at least for now. Growing electricity demand from data centers bodes well for names like American Electric.
- Growth Capex and Possible Reshoring: American Electric is looking to invest $54 billion over five years until 2029 to grow its production as well as transmission assets. While a lot of companies face headwinds from Trump’s tariffs, reshoring could help fuel power demand in the U.S. Incidentally, during its Q4 2024 earnings call, AEP listed reshoring along with manufacturing and data center demand as key growth drivers for the additional capacity it is setting up.
AEP Stock Forecast
AEP has a consensus rating of “Moderate Buy” from analysts, and the stock has run ahead of its mean target price of $103.12 amid the double-digit YTD rally. The Street-high target price of $113 is also just about 6% higher than the curernt share price.
That said, I find American Electric a good buy – especially for those looking for quality and safe dividends. AEP currently has a dividend yield of 3.5%, which looks quite healthy. The company is targeting long-term annual earnings per share (EPS) growth between 6%-8%, and its dividend growth should mimic that number. While the stock might not be a multibagger as it is unfair to expect outsized gains from regulated utilities, amid the current macro environment, AEP is perfect for risk-averse investors hunting for stocks with high dividend yields.
