Ameren: Long Growth Pipeline And Reasonable Valuation Create Investment Opportunity

Ameren: Long Growth Pipeline And Reasonable Valuation Create Investment Opportunity

steverts/iStock via Getty Images Ameren Corporation ( AEE ) is a regulated electric and natural gas utility that serves customers in Missouri and Illinois. The utility sector, in general, is quite popular with retirees and other conservative investors by virtue of its highly stable cash flows and relatively high dividend yields. Ameren is no exception to this as the stock’s 2.70% dividend yield is higher than many other things in the market. These companies also tend to deliver slow and steady earnings growth over time, and Ameren’s most recent earnings results certainly showcase this as its 2021 earnings figures were quite a bit better than the 2020 figures. There are numerous other reasons to like the stock too, particularly its very attractive valuation. As such, let us investigate and see if the stock could be right for your portfolio. About Ameren Corporation

As stated in the introduction, Ameren is a regulated electric and natural gas utility that serves customers in the states of Missouri and Illinois. These areas are much more populated than might be expected as Ameren boasts approximately 2.4 million electric and 0.9 million natural gas customers across its service territory: Ameren Investor Presentation The fact that the company is primarily an electric utility is something that might appeal to many investors. This is because many people believe that electric utilities have a much brighter future than natural gas ones. After all, there are many politicians and talking heads in the media discussing how the electrification trend will soon result in all of us heating our homes with electricity instead of fossil fuels. Although that is not quite true , the belief has generally caused electric utilities to perform better than pureplay natural gas ones in the market along with possessing generally higher valuations. There are some benefits to Ameren having both electric and natural gas businesses, though. One of the biggest advantages is that both electricity and natural gas have a certain amount of seasonality. After all, natural gas is mostly consumed during the winter months when people are using it to heat their homes. Although electricity is consumed year-round, it does have heavier consumption during the summer when it is used to power air conditioners. As such, the fact that Ameren has both electric and natural gas businesses does somewhat help to balance out the seasonal cash flows that would otherwise result were the company to be a pureplay utility.

As I mentioned in a previous article on Ameren, the company has a long pipeline of growth ahead of it. We can see this by looking at the full-year 2021 earnings results , which saw Ameren deliver earnings per share of $3.84 compared to $3.50 per share in 2020. Ameren is likely to continue on this trajectory going forward. This is because the company is constantly investing in growing its rate base. 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 specified rate of return is a percentage, any increase to the rate base allows the company to increase the price that it charges its customers in order to earn that specified rate of return. The usual way that a company increases its rate base is by investing money into upgrading, modernizing, and even expanding its infrastructure. Ameren is planning to do exactly this as the company currently plans to invest $17.3 billion into this task over the 2022 to 2026 period: Ameren Investor Presentation This is expected to increase the size of the company’s rate base from $21.1 billion today to $29.6 billion at the end of 2026, a 40.28% increase. There are some readers that may notice that this projected increase is significantly less than the amount of money that the company is investing. There are two reasons for this. The first of these is retirements as some of this planned spending is intended to purchase things that will replace assets that are currently in service. Once the retired assets are taken out of service, their value is immediately removed from the rate base, which offsets some of the impacts of the company’s capital spending. The second reason for this situation is depreciation, which causes the value of every purchased asset to steadily decline over time. In short, the company’s rate base will steadily decline over time in the absence of any new capital spending. This partially offsets the impact of the firm’s capital expenditures since something purchased in […]

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