alliant energy stock

Alliant Energy Stock: An Undervalued High-Quality Utility

Suppose you are in pursuit of a distinguished dividend growth investment opportunity. In that case, our focus turns to an undervalued utility of particular interest – Alliant Energy Stock, identified by the ticker symbol LNT. 

As of the time of writing, the stock is trading at $49.11 per share, prompting a closer examination of its valuation and suitability for investment. This analysis will assess whether Alliant Energy Corporation merits consideration as a sound destination for our hard-earned capital.

Upon scrutiny using Fastgraph, the company’s financial outlook appears promising, with anticipated annual returns exceeding 15% for the next two years at the current share price.

LNT Fast Graphs
Source: Fastgraphs

Here, we have a technical chart of LNT. We can see that it’s near a long-term trendline and down a few red bars on the monthly time frame. It is also near the COVID-19 lows. Also, the Relative Strength Index (RSI) tells us that it is currently oversold. 

Alliant Energy Stock Chart
Source: TradingView

Overview of Alliant Energy Stock

Alliant Energy Corporation is a utility holding company founded in 1981 and headquartered in Madison, Wisconsin. It provides regulated electricity and natural gas services. Through its subsidiaries, Interstate Power and Light Company (IPL) and Wisconsin Power and Light Company (WPL), the company generates and distributes electricity, transports natural gas, and serves retail customers in Iowa and Wisconsin. 

Alliant Energy Corporation also operates in rail freight services, owns a barge, rail, and truck freight terminal on the Mississippi River, and holds interests in a natural gas-fired electric generating unit in Wisconsin and a wind farm in Oklahoma. 

Northwest Natural Holding’s stock price has experienced a significant decline of 52% from its peak in January 2020. Notably, this decline cannot be attributed to any internal issues within the company, as its earnings have remained consistent. Instead, the primary driver behind this decrease is the broader overvaluation of stocks, particularly within the utility sector, which has seen a downturn in performance, and the increase of U.S. Federal Reserve interest rates.

Currently, the stock is trading at $49.11 per share, aligning closely with the lower end of its 52-week price range, which spans from $45.15 to $57.52 per share. This positioning suggests that LNT may present an attractive opportunity for investors seeking to acquire shares at a favorable price point.

LNT Overview
Source: Alliant Energy Investor Relations

Alliant Energy Stock’s Dividend History, Growth, and Yield

We will look at LNT’s dividend history, growth, and yield. We will then determine if it’s still a good buy at current prices.

LNT is considered a current Dividend Contender, a company that has increased its dividend for 11 and 24 years. 

In this case, Alliant Energy stock has increased its dividend for 20 consecutive years. LNT’s most recent dividend increase was roughly 6%, announced in January 2023.

Dividend Growth

Additionally, according to Portfolio Insight*, LNT has a five-year dividend growth rate of about 6.3%, which is reasonable considering how fast inflation increased last year and this year. The 10-year dividend growth rate is a little higher at ~6.6%.

Portfolio Insight - Dividend Growth LNT
Source: Portfolio Insight*

Something note is that LNT stock continued to pay dividends during the most challenging period in the last 100 years. Many businesses and industries cut or suspended dividend payments during the COVID-19 pandemic. However, unlike many other stocks, LNT continued to pay and increase dividends. That is very noteworthy. This fact alone leads me to believe in the strength of the company and the fact that management is focused and committed to the dividend policy.

Dividend Yield

Alliant Energy Stock’s offers an appealing computed dividend yield of approximately 3.7%, surpassing the dividend yield of the S&P 500 Index. This robust dividend yield is an attractive starting point for investors prioritizing dividend growth in their portfolios. However, it is not a solid choice for income-focused investors seeking a 4.5% or higher yield from their investments.

Portfolio Insight - Dividend Yield History LNT
Source: Portfolio Insight*

The current dividend yield for LNT surpasses its 5-year average dividend yield, which stands at approximately 2.9%. This metric provides valuable insight into the company’s valuation. The relationship between stock price and dividend yield is inherently inverse, meaning that when stock prices rise, dividend yields tend to decrease, and vice versa. Investors can gauge whether the stock is undervalued or overvalued by comparing the current dividend yield to the 5-year average. In this context, the higher current yield relative to the 5-year average suggests that LNT may be trading at a relatively attractive valuation.

Dividend Safety

Ensuring the safety of the current dividend is paramount for dividend growth investors, as undervalued dividend stocks can sometimes become “value traps,” with stock prices continuing to decline. Two crucial metrics must be examined to assess the sustainability of annual dividend payments: Adjusted operating earnings (EPS) and free cash flow (FCF) or operating cash flow (OCF) per share. 

Analysts’ projections indicate that LNT is expected to earn approximately $2.90 per share for fiscal year 2023, and historical accuracy in forecasting LNT’s future EPS is noted at 100%. Furthermore, the company anticipates distributing $1.81 per share in dividends over the entire year. This results in a payout ratio calculation of roughly 62% based on EPS, which is a good payout for a utility and leaves room for continued dividend growth. 

As a prudent approach, a payout ratio under 65% is preferred. LNT’s dividend yield ratio of approximately 3.7%, combined with expectations for future growth, supports this goal and allows the company to sustain dividend growth at a low-single-digit rate without compromising dividend safety. Additionally, LNT maintains a dividend payout ratio of 35% based on OCF, further affirming the dividend’s security in terms of EPS and OCF. 

LNT Revenue and Earnings Growth / Balance Sheet Strength

We will now look at how well LNT performed and grew its EPS and revenue throughout the years. When valuing a company, these two metrics are at the top of my list to study. Without revenue growth, a company can’t have sustainable EPS growth and continue paying a growing dividend.

LNT’s revenue has been growing reasonably at a compound annual growth rate (CAGR) of about 3.1% for the past ten years, according to Portfolio Insight*. Net income did much better with a CAGR of ~6.9% over the same ten-year period. However, EPS has grown 6.26% annually for the past ten years and at a CAGR of 7.7% over the past five years.

Portfolio Insight - Earnings_Share LNT
Source: Portfolio Insight*

Considering the company’s track record of revenue, net income, and EPS growth over the years, our evaluation will primarily focus on its valuation and dividend yield. Analysts project that Alliant Energy Corporation will sustain a 6.1% annual growth rate in EPS over the next five years because of rising rate base.

Future Growth

Notably, despite the challenges posed by the COVID-19 pandemic over the past two years, LNT achieved an 8% increase in EPS, rising from $2.43 per share in FY2020 to $2.63 per share in FY2021. Furthermore, analysts anticipate that LNT will attain an EPS of $2.90 per share for fiscal year 2023, reflecting approximately a 4% rise compared to FY2022. This consistent pattern of earnings growth is a positive indicator for investors, indicating the company’s resilience and ability to continue improving its financial performance. Additionally, the forecasted earnings for the subsequent years suggest a 6% increase in 2024 and another 7% growth in 2025, further bolstering confidence in LNT’s future earnings potential.

Balance Sheet

Furthermore, LNT maintains a robust balance sheet with a favorable debt-to-equity ratio of 1.4 with an A- S&P Global credit rating. This solid financial position enhances the company’s capacity to navigate significant economic challenges, as evidenced by its stability during the COVID-19 pandemic’s two-year impact. This aspect also contributes to the security of the company’s dividend payments.

LNT Stock’s Competitive Advantage

Investing in Alliant Energy Stock comes with both advantages and disadvantages. On the positive side, the company operates in a stable utility sector, providing consistent demand for essential services like electricity, making it appealing to income-focused investors due to its history of dividend payments. 

However, regulatory risks and limited growth potential are potential downsides, as regulation changes can impact pricing and profitability, and regulatory approvals constrain expansion opportunities. Additionally, interest rate sensitivity is a consideration due to the company’s reliance on debt financing.

Alliant Energy Stock has competitive strengths, including a robust infrastructure that acts as a barrier to entry for competitors, a strong brand known for reliability, and a commitment to sustainability, positioning it well in a changing energy landscape. Investors should carefully assess these factors based on their financial goals and risk tolerance.

Valuation for LNT Stock

One of the valuation metrics that I like to look for is the dividend yield compared to the past few year’s histories. I also want to look for a lower price-to-earnings (P/E) ratio based on the past 5-year or 10-year average. Lastly, I like to use the Dividend Discount Model (DDM). I use a DDM analysis because a business ultimately equals the sum of the future cash flow that the company can provide. 

Let’s first look at the P/E ratio. LNT has a P/E ratio of ~17X based on FY 2023 EPS of $2.90 per share. The P/E multiple is excellent compared to the past 5-year P/E average of 21.3X. If LNT were to revert to a P/E of 21.3X, we would obtain a price of $61.77 per share.

Now, let’s look at the dividend yield. As I mentioned, the dividend yield currently is 3.7%. There is good upside potential as LNT’s 5-year dividend yield average is ~2.9%. For example, if LNT were to return to its dividend yield 5-year average, the price target would be $62.41.

The last item I like to look at to determine a fair price is the DDM analysis. I factored in a 9% discount rate and a long-term dividend growth rate of 6%. I use a 9% discount rate because of the higher current dividend yield. In addition, the projected dividend growth rate is conservative and in line with its past 5-year average. These assumptions give a fair price target of approximately $48.83 per share.

If we average the three fair price targets of $61.77, $62.41, and $48.83, we obtain a reasonable, fair price of $57.67 per share, giving LNT a possible upside of 17.4% from the current price of $49.11.

Final Thoughts on Alliant Energy Stock

Alliant Energy Stock (LNT) is a high-quality company that aligns well with the needs of most investors. The company offers an attractive 3.7% yield, outperforming the broader market, and boasts a commendable track record of long-term dividend growth. Historical earnings growth has been impressive, although it’s important to note that past performance does not guarantee future results. Nevertheless, considering the current stock price, LNT is an appealing investment opportunity, presenting a potentially attractive proposition for investors seeking income and growth in their portfolios.

Disclosure: I do own shares of LNT

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My name is Felix Martinez, and I am a Dividend Growth Investor who has invested in dividend growth stocks for the past seven years. I also run a YouTube channel called FiscalVoyage. I have written for as well as I focus on undervalued dividend growth stocks with capital return and dividend income potential. Make sure to follow me on my YouTube Channel. See you there.

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