OGE vs. AEP: Which Stock Is the Better Value Option?

The electric utility sector remains a cornerstone of long-term value investing, offering stable cash flows and predictable earnings growth. Two prominent players, OGE Energy Corporation (OGE) and American Electric Power (AEP), present distinct profiles for investors seeking discounted cash flow (DCF) valuation insights and long-term earnings potential. This analysis evaluates both companies through the lens of capital allocation, growth strategies, and financial metrics to determine which stock offers superior value.

OGE Energy: Capital-Intensive Growth and Conservative Guidance

OGE Energy has positioned itself as a disciplined investor in infrastructure, with a 2025 consolidated earnings guidance range of $2.21 to $2.33 per diluted share, reflecting a midpoint of $2.27-a 5-7% annual growth target as of mid-2025. The company's capital expenditures of $6.5 billion from 2025 to 2029 underscore its commitment to grid modernization and renewable integration as reported. However, this aggressive reinvestment has compressed free cash flow, with 2024 reporting a negative $278 million, a 614% decline from 2023 according to Macrotrends.

A key input for DCF valuation is OGE's weighted average cost of capital (WACC), estimated at 6.3% as of mid-2025, derived from a cost of equity of 7.63% and a cost of debt of 4.84%. This WACC, combined with a long-term earnings growth rate of 5-7%, suggests a moderate discounting effect on future cash flows. While OGE's free cash flow challenges are evident, its focus on zero-emission resources and grid reliability aligns with regulatory tailwinds, potentially insulating it from margin compression in a decarbonizing energy landscape as noted.

AEP: High-Growth Ambitions and Overvaluation Concerns

American Electric Power (AEP) has demonstrated stronger near-term earnings momentum, with 2024 GAAP earnings of $5.60 per share-a 7% increase year-over-year-and a reaffirmed 2025 operating earnings guidance range of $5.75 to $5.95 per share as per SEC filings. Its long-term EPS growth rate of 6-8% is among the highest in the sector as reported, supported by a $54 billion five-year capital plan to meet rising commercial load demand as disclosed.

However, AEP's 2024 free cash flow was negative $464 million, a 54.7% drop from 2023 according to AlphaQuery, raising questions about its ability to sustain growth without external financing. A DCF model using a 5.8% WACC and 2% long-term growth rate values AEP at $85.63 per share, implying a 26% overvaluation relative to its current price as calculated. This discrepancy highlights the risk of overpaying for a stock with high growth expectations but underperforming cash flow generation.

DCF Valuation and Long-Term Earnings: A Comparative Lens

For OGE, the DCF model's sensitivity to its 6.3% WACC and 5-7% growth rate suggests a more conservative intrinsic value. While its free cash flow struggles are a near-term headwind, the company's focus on regulated utilities-where returns are often guaranteed by regulators-reduces downside risk. OGE's reinvestment in natural gas generation and grid resilience also positions it to capture incremental load growth in its Oklahoma and Texas service territories as stated.

AEP's higher growth rate is enticing, but its negative free cash flow and elevated valuation metrics create a mismatch between expectations and fundamentals. The $54 billion capital plan, while ambitious, requires sustained access to low-cost debt and equity markets. AEP's 2025 guidance assumes continued economic development in its service area, but macroeconomic volatility could disrupt these assumptions as noted.

Conclusion: OGE Emerges as the Better Value Option

While both OGE and AEP are investing heavily in their futures, OGE's disciplined capital allocation, lower WACC, and alignment with regulatory trends make it the more attractive value play. AEP's overvaluation and cash flow challenges, despite its robust growth guidance, introduce unnecessary risk for long-term investors. For those prioritizing DCF-driven value, OGE's conservative yet sustainable growth trajectory offers a more compelling risk-reward profile.