Summary
- Quantitatively SA Quant currently rates Allete as a Sell.
- Qualitatively the case can be made Allete is a Hold.
- At the end of the day whether to Hold or Sell depends more on the investment objectives of each individual investor.
Transitioning from the old to the new.
It was time to do update articles on two electric utilities stocks I have covered before. One was Allete ( ALE ), and then Keith Williams posted his excellent article, " Allete: Dividend Play, Leading The Renewables Transition ". I was pleased to see that article pop up because Keith brings quite a different perspective than I usually do. You see, Keith leans towards the qualitative, whereas, possibly as a result of my background, I lean towards the quantitative. Of course, as Keith noted both qualitative and quantitative have a place in stock reviews. In fact, I see all three - quantitative, qualitative and technical analysis - as valuable for stock reviews. Keith's qualitative review centered around Allete's shift to renewables. The other stock I had in mind for an article update was MGE Energy ( MGEE ), which is also earnestly moving towards renewables. For a pure quantitative opinion I would not go past Seeking Alpha's Quant ratings.
Figure 1 below provides an overview of SA Quant's rating of the two companies.
Figure 1
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Note that SA Quant rating for Allete changed from "Hold" to "Sell" the day after Keith's article was published with a "Hold" rating. Both Keith and I have "Hold" ratings on Allete in our most recent articles, and for my part I see no reason to change rating. In my most recent article on MGE Energy, " MGE Energy: Moving With The Times ", I concluded, "MGEE remains a hold for existing shareholders and a potential buy for prospective investors in the stock, particularly on any dip in share price." I see no reason to conclude differently today. But SA Quant has warnings for both Allete and MGE Energy highlighted on the summary page for these stocks, as per Figure 2 below.
Figure 2
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SA Quant explains why ALE is at high risk of performing badly,
- ALLETE, Inc. has characteristics which have been historically associated with poor future stock performance. ALE has inferior profitability and negative EPS revisions when compared to other Utilities stocks, to the point that it gets a Sell rating from our Quant rating system. Stocks rated Sell or worse by our Quant rating system have massively underperformed the S&P 500, as this article will describe.
- The company has EBIT Margin ((TTM)) of 9.96% while the Utilities sector median is 17.97%.
SA Quant rates stocks on the basis of how their quantitative performance compares to other stocks in the same sector/industry. So a stock that is performing steadily can be down graded as a result of outperformance of other stocks in the same industry. In this regard it is useful to look at some of the top performing stocks in Electric Utilities per SA Quant. But first a summary in Table 1 of quantitative performance of Allete since 2016.
Table 1
SEC filings and SA Premium
Allete Business operations perspective -
From a business operations perspective, net income has only grown by 3.4% average per year from 2016 to 2022, and the regulated operations net income by 1.7% per year. But this overlooks the fact that Allete Clean Energy is investing significant amounts in renewable energy assets both for own generation and for development and sale of these assets. Within Corporate and Other a similar approach is being taken. So we can expect to continue to see one off gains on sale similar to those appearing in Table 1. This is part of the qualitative aspect Keith drew to attention in his recent article linked above.
Allete Shareholder perspective -
From a dividend growth investor's perspective, yearly dividends have increased by an average of 4.7% over the six years 2016 to 2022. While the share price has declined by $2.45 over the period, a dividend growth investor buying at end of 2016 has received $16.38 in dividends through end of 2022. Rather than selling at current low price, an investor would likely be advised to continue collecting the dividend while waiting for a higher price, or taking the opportunity to buy at the high current dividend yield of 4.3%. From a dividend safety perspective I believe it is useful to compare dividend outflows to profits earned over a number of years. This is particularly useful where earnings are 'lumpy' as Allete's have been and are likely to continue to be due to development and sale of renewable assets alongside the regulated operations. My balance sheet analysis shows for 2017 to 2022 dividend payments total $751 million compared to net income from operations total of $1,064 million, a payout ratio of ~71%. Over the same period net assets used in operations have increased by $1,153 million and net debt as a percentage of net debt plus equity has decreased from 44.7% to 41.2%. The dividend and the dividend growth rate have been and are likely to continue to be quite sustainable.
SA Quant rating says "Sell" - what to "Buy" in place?
SA Quant rating says "Sell" - which leads to the question - what to "Buy" in place? It is at this point I realised consciously possibly for the first time, there is another most important factor to be taken into account when writing an article on a stock. Who is most likely to be reading this article - what type of investor and what investment time frame might they have? From Justin Giles recent article, " Seeking Alpha Contributor Community 2022: By The Numbers ",
Dividends, Dividends, Dividends! SA readers love reading about them so it was no surprise that the Top 3 contributors with the most likes this past year all wrote about dividend opportunities .
So, the most likely readers of this article, those with an interest in Allete, will almost certainly be investors looking for sustainable dividends with long term dividend growth prospects, with a view to buy and hold in the long term. I wondered if SA Quant ratings might be useful for these dividend growth investors' decisions. To this end I compiled Table 2 below comparing the five (5) top ranked electric utilities companies per SA Quant to Allete.
Table 2
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Imagine you are a retired and possibly conservative dividend growth investor faced with a decision whether to sell 38th ranked electric utility Allete and use the proceeds to buy one or more of the 5 top ranked electric utilities. The listing detail for three of the stocks is "Pink" - if I even know what Pink sheets are do I have access to place an order and pay? Four of the five top stocks have operations outside the US - am I prepared for country and exchange risks, what withholding taxes on dividends and how to get rebates? Two of the stocks do not even pay dividends. The one pure U.S. play is PG&E Corporation which was previously bankrupted by wildfire claims. Wildfire risks are being addressed, but still exist, and there is still a ban on paying dividends as a result of the bankruptcy. Pampa Energia is listed on NYSE, has a very low PE ratio ((FWD)) of 6.32 and could possibly provide large capital gains through multiple expansion. But, as a conservative dividend growth investor, am I prepared to give up a safe 4%+ dividend yield from Allete for an investment in a foreign company with attendant country and currency risk for a possible indeterminate capital gain.
Conversely, for an investor with a different investment approach and a different investment time frame, looking for short-term trading gains, an article on Allete would hold no interest, and an investment in one of the five top ranked stocks in Table 2 could make eminent sense. Clearly, that is the class of investor for whom SA Quant ratings would have the greatest value.
Summary and Conclusions
Table 1 above shows Allete PE ratio is currently towards the low end of the range it has fluctuated in over the last 6 years. Earnings growth from ongoing operations has been fairly weak, with some intermittent boosts from development and sale of renewables projects. The company appears to be positioning itself well with further investments in renewables generation both for its own ongoing operations and for sale at a profit to others. At current share price, ALE stock is likely a hold for existing shareholders aiming for a growing dividend stream, and likely a buy on any weakening in the share price.
For further details see:
Allete: The Qualitative And The Quantitative