LNT - Alliant Energy: A Consistent Grower

2024-01-20 07:08:51 ET

Summary

• Alliant Energy Corporation is a consistent utility company with an attractive dividend yield.
• The company has maintained mid-single-digit earnings growth and increased its net income margin over the last decade.
• Alliant Energy has extensive capital investment plans, including renewable energy projects, which should support future earnings growth.
• The dividend can be considered safe and the yield is generous.

Utility companies are often a favorite of dividend growth investors because their consistent business models tend to lead to generous yields.

One name that has proven to be very consistent over the years and offers an attractive dividend yield is Alliant Energy Corporation ( LNT ).

Alliant Energy is a Wisconsin based utility company that provides electric and natural gas services to customers in the Midwest. In total, the company serves 995,000 electric and 425,000 natural gas customers through its subsidiaries Interstate Power and Light Company and Wisconsin Power and Light Company. Alliant Energy is on the smaller side, as it has a $12.6 billion market capitalization. The company has generated revenue of just over $4 billion over the last year.

Shares of the company have fallen almost 9% over the last twelve months as utilities in general have struggled.

Some of this weakness is due to interest rates remaining at elevated levels relative to much of the past decade, causing the financing of debt to be a material headwind to results.

Despite the near-term decline in the share price, there remain several reasons that the stock is attractive in my opinion, solid results and a nearly 4% dividend yield that should be safe.

Profitability Performance is Mixed, But There Are Reasons for Optimism

Overall, Alliant Energy’s profitability report card does leave something to be desired.

The company has a soft profitability grade compared to the rest of the utility sector, but there are bright spots. Foremost among them is that the company’s margins fair well against peers, and that is due to the consistent nature of its business.

Utilities are hardly sexy growth names, but they are often very reliable businesses. Customers are always in need of their services, keeping demand for electricity and natural gas elevated.

Alliant Energy, despite its smaller size, has proven to be very steady over the years. From 2013 to 2022, earnings-per-share grew with a compound annual growth rate ((CAGR)) of 5.6%. Looking at just the last five years, that growth rate remains near the long-term average at 5.2%. The company has maintained its mid-single-digit earnings growth rate even as it issued 30 million shares over the last decade. Net income has a CAGR of 6.2% for the same period.

It should be noted that revenue has fallen by 40% over the last decade. Alliant Energy has navigated a drastic decrease in revenue because it is extracting more profit out of its top-line than ever before. The company’s net income margin has increased steadily over the years, expanding 480 basis points to 16.3% over the last decade.

The company has a stated earnings growth target of 5% to 7%, which is essentially what it has accomplished over the last decade. The company’s guidance reflects this long-term trend.

Mid-single-digit earnings growth should be supported through a variety of ways.

Alliant Energy has extensive capital investment plans over the next few years. The company has a capex budget of $8.5 for the 2023 to 2026 period. This investment is targeted for several areas of the business.

The largest portion of investment will be in renewables and battery storage, but some will be allocated towards projects such gas and electric distribution. At the time of the most recent quarterly report, the company announced that it was increasing its investment spending by $600 million to $9.1 billion for the 2024 to 2027 period. As a result, Alliant Energy’s rate base is projected to grow by 8% per year from 2023 levels through 2027.

Another reason for optimism is that the stock appears to be undervalued. Shares of Alliant Energy are trading at 16.9 and 16.0 times expected earnings-per-share for 2023 and 2024, respectively. For context, Alliant Energy has typically traded with a price-to-earnings ratio in the high teens to low 20s for much of the last decade. Investors purchasing at the current valuation could see a positive contribution from multiple expansion.

Dividend Analysis

Along with solid earnings growth, Alliant Energy has provided investors with dividend increases for more than two decades. This compares very well to the utility sector.

Earlier this week, Alliant Energy announced that it was raising its quarterly dividend 6.1% to $0.48 per share. This growth rate is right in the middle of the company’s guidance for future increases. It also happens to nearly match the dividend’s CAGR of 5.9% for the 2014 to 2023 period.

Looking closer at the company’s dividend, it appears that Alliant Energy’s grades compare, for the most part, decently to other utility names.

The one area of the company’s dividend that is just average is the yield. However, Alliant Energy’s new annual rate of $1.98 equates to a yield of 4.1% at current price levels. This is approaching three times the average yield of the S&P 500 Index. This also compares favorably to the 3.5% yield for the Utilities Select Sector SPDR Fund ETF ( XLU ) and 2.9% yield for the iShares U.S. Utilities ETF ( IDU ).

Alliant Energy’s dividend should also be safe. While the company has yet to release full year results for 2023, the company distributed $1.81 in dividends per share last year. With earnings-per-share projected to be $2.90, this equates to a payout ratio of 62%, matching the 10-year average payout ratio. Alliant Energy has guided towards earnings-per-share of $3.06 for 2024, resulting in an expected payout ratio of 63% for the year. Both payout ratios are close to the low end of the company’s stated payout ratio goal of 60% to 70%.

Risks to Investment Thesis

As with all investments, there are factors that could work against the company that investors should consider.

First, Alliant Energy, like nearly all utility companies, relies on rate base increases to further grow its business. Therefore, the company must spend heavily on projects that can help guarantee regulators will approve of rate bases. This is more likely to occur when capital spending is used to improve the overall quality of the company’s operations, but it is by no means a guarantee to occur. Management has stated that rate bases are expected to be 8% annually for the next four years.

Second, the rising interest rate environment can make the cost of capital more expensive than it has been in some time. Alliant Energy does carry a considerable amount of debt on its balance sheet. As of the third quarter, the company had total debt of $9.34 billion. This is not an insignificant amount, considering the size of the company.

The company repaid $404 of obligations during the first nine months of 2023, but also issued close to $1.2 billion of debt to help fund capital investment as well as to paydown maturing debt. Interest expense is beginning to approach $400 million annually. This would be up from $325 million in 2022 and $277 million in 2021.

Alliant Energy has a debt-to-equity ratio of 1.39. While not yet in a dangerous range, it does require watching.

Final Thoughts

Utility stocks are often owned by investors because their consistent results can lead to solid yields and dividend growth.

This has been the case for Alliant Energy, as its earnings and dividend growth rates have been very steady over the long-term. Investments and rate base assumptions should result in continued growth for both as well.

The company recently raised its dividend, as it has done for 21 consecutive years now. Shares also appear to be trading with a valuation below typical levels while offering a yield of more than 4%.

These factors make Alliant Energy an interesting name for those investors looking for a utility stock to add to their portfolio.

For further details see: