2023-08-30 04:56:47 ET
Summary
- ALLETE is the largest investor in renewable energy and has a long-term target of growing at 5-7% annually.
- The company operates in multiple sectors of the energy market, including coal-fired, biomass, hydroelectric, wind, and solar sources.
- ALE aims to maintain a solid payout ratio and has the potential for an annual ROI of 11%, making it a favorable investment.
Investment Rundown
Those willing to make the bet that renewable energy will be a leading energy source one day should be looking at ALLETE ( ALE ) right now. The company presents itself as the largest investor in renewable energy in comparison to the size of the business. I think the market for this is very appealing as a lot of investments are pouring into it as we speak. Green energy is a hot topic and I think there will be a lot of winning companies in the industry as the transition over to renewable energy happens. The IRA was a major tailwind for the industry and I think we are likely to see even more ones going forward.
The company may still be generating electricity from coal-fired and biomass-founded plants but this foundation of the business seems to have made them able to disturb a great dividend which right now sits at around 4.8%. The share price has performed quite badly in the last 12 months, however, the divined has helped offset some of the losses. The company has a long-term target of growing at 5-7% annually and I think they will achieve this as more investments are going into the space. I like the valuation and will be rating the company a buy right now.
Company Segments
ALE operates as an energy business, with its operations covering multiple sectors of the energy market. Operating through various segments like Regulated Operations, ALLETE Clean Energy, and Corporate and Other.
The energy operations of ALE are diverse and include coal-fired, biomass co-fired/natural gas, hydroelectric, wind, and solar sources. This eclectic approach to energy generation underpins the company's commitment to sustainable and forward-looking solutions. The company has been having managed to through this diversified set of exposure grow the asset base very well as it has been on a 7.51% CAGR for the last 10 years. With a large asset base the company can further leverage this into growth and returns in my opinion.
Assets (Investor Presentation)
Within its Regulated Operations segment, ALE extends its reach to northwestern Wisconsin, delivering utility electric services to a substantial customer base. In this geographical area, approximately 15,000 electric customers, 13,000 natural gas customers, and 10,000 water customers rely on ALE which has given the company a fantastic market position that is hard to take away from them. Besides this though, the company's operations extend to northeastern Minnesota, where it serves around 150,000 retail customers.
Company Plan (Investor Presentation)
As we have learned, ALE is aiming at further developing its renewable asset base and right now is set on growing at a 5 - 7% annual growth rate. Mentioned just above here is that ALE holds assets like wind and solar which are asst bases that ALE sees as strong investment opportunities going forward.
Growth Targets (Investor Presentation)
Much of the appeal as well with ALE comes from the fact that they are aiming to maintain a solid payout ratio as they leverage their investments into dividend growth. A target payout ratio of 60 - 70% has been mentioned and the dividends are to grow in line with the EPS of 5-7%. If we see such an achievement, then on the higher end of the projections ALE could potentially yield an 11% return annually if the share price continues to grow as fast as the EPS does. It seems that the market is not fully pricing this in as the p/e sits about 10-12% below the sector. I think this discount opens up the possibility for the buy case very well.
Risks
Looking at the earnings of ALE there are some concerns, It seems some of the quality of the earnings is worrisome and this might be the cause for the discount the company receives. This aspect garnered substantial attention a couple of years ago, leading to a credit downgrade from one of the prominent rating agencies. This event spotlighted a fundamental issue that goes beyond surface-level financial metrics.
Net Income (Macrotrends)
However, I think that the incentive to go more towards renewables is in the end ultimately going to lead to ALE performing very well in terms of ROI for investors. The sheer capital and government push for it are hard to ignore and not want to benefit from.
Financials
As much of the operations for ALE involves investing and expanding into renewables, maintaining a sound balance sheet is incredibly important and I think the company does have that right now, but there are also some things I’d to see improved.
The cash position for example has been declining on a YoY basis which isn't very reassuring to see. Right now it sits at $29.9 million, down from $36 million at the end of 2022. In comparison to the long-term debts of $1.7 billion, there is a clear discrepancy that I don’t like very much. For further financial stability to be achieved, I think more of the earnings are to go towards paying down the debt and increasing the cash position. It would bring with it a higher valuation so likely that renewable investments do bring some risks with it and having a strong balance sheet will help offset some of that.
Industry Comparison
Comparing ALE to another company in the sector we have MGE Energy ( MGEE ) which compared to ALE has a less appealing valuation in my opinion. The p/e sits at 22 compared to the p/e of 15 for ALE. Both of the companies have a dividend being distributed but ALE sits far higher with its 4.5%. I think the long-term potential ROI is higher with ALE in combination with the dividend. A potential annual ROI of 11% seems possible which puts ALE ahead of MGEE right now.
Besides this, it seems that the share price for ALE is also finding its base around the $55 mark. If this proves to be a solid support level for the share price I think the risk/reward is very favorable for the company right now, appealing enough to make it a buy.
Final Words
There are a lot of people right now investing in renewable energy and it seems a leader of them is ALE given the size of the company in comparison to the investments it's making. Shifting operations like this I think in the long run will be very beneficial for the company. One of the perhaps worrying things is the high dividend payout ratio for the company that sits above 77%. There is a risk that the dividend won't see the same type of growth it has the last few years as it sort of reaches a ceiling. If ALE can, as I think maintain the EPS target growth of 5 - 7% then the dividend can be sustained and increased as well without risking too much loss of expansion or growth. The last few years the investment and growth of green energy has increased rapidly, but it's worth noting that ALE has already for 12 years in a row raised the dividend. This goes to show me at least the company has the possibility of maintaining to be a dividend income stock opportunity at a good price.
The valuation is intriguing and the potential for an annual ROI of 11% makes me rate the company a buy right now.
For further details see:
Allete: A Potential Buy In Renewable Energy