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Ameren Corporation (NYSE:AEE) is a regulated electric and natural gas utility that serves much of the state of Illinois, as well as the eastern half of Missouri.
Ameren Corporation
The company’s service territory includes the city of St. Louis, Missouri, which is by far the largest city in its service area as it does not include Chicago and the surrounding suburbs. In fact, the company’s service territory is largely rural. However, it still shares many of the characteristics that have long made utility companies popular among retirees and other conservative investors, such as very stable cash flows over time along with relatively high dividend yields. Indeed, Ameren Corporation yields 3.15% at the current stock price, which is well above the current yields of the S&P 500 Index (SPY) or even the U.S. Utilities Index (IDU). We last discussed this company back in June and determined that it does appear to have a lot to offer someone that does not want to have a lot of risk in their portfolios but it was rather expensive at the time. The stock price and valuation have improved a bit since then, and the company released its second-quarter earnings report, so let us revisit it and see if it still makes sense for your portfolio today.
About Ameren Corporation
As stated in the introduction, Ameren Corporation is a regulated electric and natural gas utility that serves most of the state of Illinois and the eastern half of the state of Missouri. As the map above shows, the company’s service territory covers a large geographic area but other than the city of St. Louis, Missouri, and the surrounding suburbs, its territory is mostly rural. As such, the company’s customer count is not as high as might be expected. Ameren Corporation currently serves about 2.4 million electric and 900,000 natural gas customers throughout its territory. That is sufficient to make it one of the largest utility companies in the United States, even though it is not one that we often hear about unless you happen to reside within its service territory.
The fact that Ameren Corporation has more electric customers than natural gas ones might appeal to some investors. I explained why in my last article on the company:
“Over the past few years, politicians and others in the media have been making claims about how natural gas will soon become obsolete as people convert to electricity for all of their energy needs. This claim is nonsensical because natural gas is much more economically sensible as a source of heat. In short, natural gas is more efficient at creating heat than electricity so it is cheaper to use for such purposes. That is almost certainly going to be a very important consideration for people of limited means, who are very unlikely to spend a considerable amount of money to convert a space heating system to electricity from natural gas only to have their heating bills go up.”
I published an article earlier this week that showed the difference between natural gas and electricity as a heat source in terms of cost. The end conclusion is that it costs almost four times as much to run an electric heating system as a natural gas one. While technology may eventually provide ways to overcome that, this is still a long way off and for now, it is highly unlikely that natural gas utilities will be going the way of the dinosaur in the near future. Thus, this portion of Ameren Corporation’s business is probably pretty safe.
In the introduction to this article, I stated that Ameren Corporation enjoys remarkably stable revenue and cash flow over time. Here are the company’s revenues during each of the past eleven twelve-month periods, including the one that ended on June 30, 2023:
Seeking Alpha
Here are its operating cash flows during each of the same periods:
Seeking Alpha
As we can see, they are far less variable than what we would see in many other industries. The reason for this is that Ameren Corporation provides a service that is generally considered to be a necessity for our modern way of life. As such, people prioritize paying their utility bills ahead of discretionary expenses during periods when money gets tight.
There are signs that money may be getting tight for many consumers. As I explained in a recent blog post, many consumers have begun resorting to desperate measures to maintain their lifestyles in the face of the highest inflation that we have seen in forty years. These measures include things that were once thought unthinkable for the average American, such as dumpster diving and pawning possessions. Earlier today, it was revealed that for the first time ever, more Americans are carrying revolving balances on their credit cards than are paying them off in full every month. This is despite the fact that credit card interest rates are at the highest levels that we have seen in years and is a very clear sign of consumer desperation. This will eventually force consumers to cut back on spending since credit cards do have limits, although it is uncertain how long it will take until consumers finally hit the wall and are forced to stop spending. Once that happens, it will affect companies that are highly dependent on consumer spending much more than it will a company like Ameren Corporation that provides necessary products. Thus, Ameren is exactly the kind of company that you want to hold in your portfolio during challenging economic times.
We can see the company’s ability to weather challenging economic environments above. The early periods on the charts of the company’s revenues and operating cash flows include the pandemic-driven lockdowns that caused many people to end up unemployed and numerous businesses to shut down. It also includes the inflationary period that followed the pandemic lockdowns, as well as the reversal of the Federal Reserve’s longstanding “free money” policy. Seemingly none of these things had any effect on Ameren. Clearly, then, this is a company that should be able to handle whatever conditions may be coming.
Growth Prospects
There are two ways through which a company like Ameren can generate growth. The first of these is through population growth in its service territory. The second is by growing its rate base. Unfortunately, for Ameren, it cannot depend on population growth as a way to grow its revenues. As I pointed out in my previous article on the company, the population of Illinois is declining fairly rapidly and it more than offsets the population growth in Missouri. Thus, it seems rather unlikely that Ameren will be able to grow its customer base to any significant degree going forward. While it is possible that the exodus from Illinois will eventually abate or even reverse itself, that seems unlikely in the near future.
This leaves growing the rate base as the only realistic option for the company. I explained how this works in the previous article:
“The rate base is the value of the company’s assets upon which regulators allow it to earn a specified rate of return. As this rate of return is a percentage, any increase to the rate base allows the company to positively adjust the prices that it charges its customers in order to earn that specified rate of return. The usual way through which a company increases the size of its rate base is by investing capital into upgrading, modernizing, and possibly even expanding its utility-grade infrastructure.”
Ameren Corporation has budgeted $19.7 billion for the purpose of upgrading its infrastructure and increasing its rate base. This money is to be spent over the 2023 to 2027 period, which should be sufficient to grow its rate base at an 8.4% compound annual growth rate over that period:
Ameren Corporation
One thing that we immediately note is that the rate base will not increase by anywhere close to the level of planned spending. The company expects that it will have a rate base of $34.5 billion at the end of 2027 compared to $23.1 billion at the start of 2023. That is only a $11.4 billion increase despite $19.7 billion in spending. This is normal for a capital-intensive business, however. One major reason for this is depreciation, which is constantly reducing the value of the company’s assets that are currently in service. Basically, the company would actually have its rate base decline if it were to spend nothing on its infrastructure in a given year. The company needs to spend sufficient capital to overcome the depreciation decline and still grow its rate base.
Based on the company’s projected rate base growth over the period, Ameren Corporation should be able to grow its earnings per share at a 6% to 8% compound annual growth rate. When we combine this with the 3.15% current dividend yield, that gives us a projected total annual return of 9% to 11% through 2027. That is certainly a respectable return for a conservative utility company, particularly considering that the economy is quite likely to enter into a recession within that time period.
We saw this growth trajectory play out during the most recent quarter. In the second quarter of 2023, Ameren Corporation reported an earnings per share of $0.90 compared to $0.80 per share in the prior year quarter. That was a 12.5 percent increase, which is a bit above the earnings growth projection. Thus, we might see growth slow down a little bit over the coming quarters, but the overall trend should still prove positive for investors.
Missouri Solar
One area in which Ameren Corporation is spending heavily is renewable energy. In particular, the company is planning to invest a considerable amount of capital into developing renewable generation facilities throughout its service territory in Missouri, as well as one or two plants in Illinois:
Ameren
As we can see, the company has a total of 900 megawatts of new solar projects under development that are scheduled to come online between now and the middle of 2026. These plants will help the company comply with Missouri’s renewable energy requirements, but unfortunately, they will not result in any growth beyond what we already discussed. This is because these plants will all be included in the company’s rate base, and ultimately it is the value of the rate base that determines the rates that regulators allow the company to charge its customers. This is both an advantage and disadvantage of utility companies like Ameren. They basically have guaranteed profits due to regulations, but they also cannot really deliver outsized profit growth.
The fact that the company is investing heavily in the development of solar energy could appeal to those investors who are involved with the environmental, social, and governance movement, however. This was a fairly popular investment philosophy back in 2021, but it has lost some of its edge ever since the Federal Reserve started tightening monetary policy. As we can see here, environmental, social, and governance funds in the United States began suffering outflows in mid-2022 that reversed the previous growth trend:
Bankrate.com
However, it is a different story in Europe, and globally the assets of environmental, social, and governance funds reached $2.5 trillion at the end of 2022 according to Morningstar. The point here is that there is a lot of money invested in these funds, and these funds claim to direct their investment money toward companies that score highly in sustainability measures. The fact that Ameren is devoting a great deal of effort to constructing solar facilities could begin to attract some of the money possessed by these funds. That could prove positive for the stock price, at least when compared to other companies that do not devote as much effort to meeting subjective environmental goals.
Financial Considerations
As I explained in numerous previous articles, including the previous one on Ameren,
“It is always important to investigate the way that a company finances itself before making an investment in it. This is because debt is a riskier way to finance a company than equity because debt must be repaid at maturity. That is normally accomplished by issuing new debt and using the proceeds to repay the existing debt since very few companies have sufficient cash on hand to repay debt as it matures. This can cause a company’s interest expenses to increase following the rollover in certain market conditions. In addition to interest-rate risk, a company must make regular payments on its debts in order to remain solvent. As such, an event that causes a company’s cash flows to decline could push it into financial distress if it has too much debt.”
The concern about interest-rate risk has taken on something of new importance lately considering that the effective federal funds rate is at the highest level that has been seen since 2007. The federal funds target rate is even higher, as it is now at levels that have not been seen since 2001. As such, it is a near certainty that any debt rollover today will cause the company’s interest expenses to increase. We have already seen this with peer utility Eversource Energy (ES), as I pointed out here.
As of June 30, 2023, Ameren Corporation has a net debt of $16.0000 billion compared to $10.8260 billion in shareholders’ equity. This gives the company a net debt-to-equity ratio of 1.48 today. That is slightly worse than the 1.45 ratio that the company had at the end of March, but it is not overall a horrible change. Here is how Ameren Corporation compares to its peers in this respect:
|
Company |
Net Debt-to-Equity Ratio |
|
Ameren Corporation |
1.48 |
|
Entergy Corporation (ETR) |
1.92 |
|
DTE Energy (DTE) |
1.89 |
|
Eversource Energy |
1.58 |
|
CMS Energy (CMS) |
1.91 |
Click to enlarge
As was the case the last time that we discussed Ameren Corporation, the company maintains a significantly lower net debt-to-equity ratio than its peers. This is a sign that it is not overly reliant on debt to finance its operations. This is nice to see considering the current rising rate environment. The company’s debt thus should not be anything that we need to worry too much about.
Dividend Analysis
One of the biggest reasons that we invest in utilities is because of the high yields that these entities usually possess. As already mentioned, Ameren Corporation yields 3.15% at the current price, which is considerably higher than the 1.49% yield of the S&P 500 Index as well as the 2.68% of the U.S. Utilities Index. Ameren Corporation also has a long history of raising its dividends on an annual basis:
Seeking Alpha
The company’s current dividend is 6.78% higher than it was a year ago, which is very nice because that is actually a big enough year-over-year increase to overcome the current inflation rate. Thus, the purchasing power of this company’s dividend did not decrease nearly as much as some other companies’ payouts.
Unfortunately, Ameren Corporation was not able to cover its dividends out of free cash flow in the current period. During the twelve-month period that ended on June 30, 2023, Ameren Corporation reported a negative levered free cash flow of $1.4010 billion. It paid out $635.0 million in dividends despite this negative free cash flow. That could be concerning to some investors.
As I have mentioned numerous times before though, utilities frequently finance capital expenditures through the issuance of equity and debt and then pay their dividends out of operating cash flow. This is due to the very high costs involved with constructing and maintaining utility-grade assets over a wide geographic area. During the most recent trailing twelve-month period, Ameren Corporation had an operating cash flow of $2.5020 billion. That was easily enough to cover the $635.0 million that was paid out in dividends with a great deal of money left over that can be used for other purposes. Thus, the dividend is probably safe at the current level, and we should not have to worry about it too much.
Valuation
According to Zacks Investment Research, Ameren Corporation will grow its earnings per share at a 6.43% rate over the next three to five years. This is in line with the rate that the company should be able to produce based on its rate base growth, so it seems like a pretty reasonable estimate. This gives Ameren a price-to-earnings growth ratio of 2.84 at the current stock price. That is a bit more attractive than the last time that we looked at the company, which makes sense considering that the company’s stock price has gone down a bit, but its growth prospects have not really changed.
Here is how Ameren Corporation compares to its peers:
|
Company |
PEG Ratio |
|
Ameren Corporation |
2.84 |
|
Entergy Corporation |
2.50 |
|
DTE Energy |
2.82 |
|
Eversource Energy |
2.58 |
|
CMS Energy |
2.34 |
Click to enlarge
Unfortunately, Ameren Corporation is not the most attractively valued company on the list. In fact, as was the case before, it currently appears to be somewhat overvalued relative to its peers. This could be a result of the fact that its balance sheet is a bit stronger than the other companies here, as we have already discussed. As a result, it is at a somewhat lower risk of problems caused by rising interest rates.
Conclusion
In conclusion, there could be some reasons to like Ameren Corporation today. In particular, the company’s cash flows and profits should prove highly resilient to a weakening economy. That is particularly important today considering that we are seeing more and more signs of an impending recession. The company is also investing a considerable amount of money into renewable energy facilities, which could attract investors and investment dollars that are interested in that sort of thing. When we combine this with a strong balance sheet, investors can find a lot to like here. The only problem is the valuation, but even that is more attractive than it was only two months ago.
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