Since the launch of OpenAI's chatbot and virtual assistant, ChatGPT, in November 2022, artificial intelligence has gone mainstream. Regardless of a company's economic sector or subindustry, it's almost impossible to listen to an earnings call these days without a mention of AI in some way.
Practically, many companies have already automated their businesses further with chatbots and digital assistants. Those that haven't already seem likely to do so in the years ahead.
Another major way that AI is changing the business landscape is through data centers. The need for data center expansions and the construction of new data centers to support this demand is also projected to be a boon for electric utilities.
The Electric Power Research Institute estimates that data centers responsible for powering advanced AI models could comprise up to 9.1% of U.S. energy demand by 2030. For context, that would be substantial growth from the current measure of around 4%.
One of the utilities that looks set up to benefit is the Madison, Wisconsin-based Alliant Energy (NASDAQ:LNT). When I last covered the utility with a buy rating in April, there were a few things that I valued. I viewed the economic development that was happening in its service areas as a boost to growth prospects. I also appreciated LNT's 21-year dividend growth streak. The investment-grade balance sheet was another attractive feature. Finally, shares looked to be a moderate value.
Today, I'm updating my coverage of LNT and standing by my buy rating. Positive regulatory developments in Wisconsin and Iowa bode well for the future. Earlier this month, the company flexed its balance sheet to secure capital at a very low cost. Lastly, LNT's shares could be trading at a double-digit discount to fair value.
LNT Has Major Events Breaking Its Way
On May 2, LNT shared what I thought were acceptable financial results for the first quarter that ended March 31. The company's total revenue dipped by 4.3% year-over-year to $1 billion during the quarter. That fell $150 million short of the analyst consensus in the quarter.
Initially, this revenue miss may seem disappointing. So, why am I not at all worried about LNT?
Well, there were a couple of unforeseen and uncontrollable factors that weighed on the company's first-quarter results.
For one, the cost of natural gas was significantly less versus the year-ago period. LNT's cost of gas sold dropped by 37.1% year-over-year to $114 million for the first quarter. Because the company is a regulated utility, these lower natural gas costs were passed onto customers.
Additionally, mild weather patterns had an unfavorable impact on results. According to CFO Robert Durian's opening remarks during the Q1 2024 Earnings Call, the company's service territory experienced the warmest first quarter for Cedar Rapids and Madison since 2012.
LNT's diluted EPS declined by 4.6% over the year-ago period to $0.62 during the first quarter. That matched the analyst consensus per Seeking Alpha.
A decrease in earnings is something that I don't like to see. However, more context excuses this from LNT. That's because according to Durian, the milder temperatures impacted the company's diluted EPS by an estimated $0.08 in Q1 2024. Compared to the $0.04 unfavorable impact in Q1 2023, LNT's diluted EPS would have edged 1.5% higher adjusting for normalized temperatures.
Since the company met the analyst consensus in the first quarter, it reaffirmed its guidance for 2024. LNT anticipates that diluted EPS will be a midpoint of $3.06 ($2.99 to $3.13). The $3.06 FAST Graphs analyst consensus is in agreement with this guidance, which would be an 8.5% growth rate over the 2023 base of $2.82.
Beyond just this year, LNT's operating momentum looks like it can be sustained for two reasons.
Iowa and my home state of Wisconsin are each taking steps to grow in their allure to draw in more businesses. Last month, Iowa Governor Kim Reynolds signed the Mega Project Bill into law. This provides tax incentives to attract large businesses to Iowa.
LNT's President and CEO Lisa Barton noted that the company's Prairie View Industrial Center in Ames and Big Cedar Industrial Center in Cedar Rapids meet the legislation's criteria. Over time, this should draw more major businesses to the Iowa service area.
In March, Wisconsin Governor Tony Evers signed bipartisan electric vehicle bills into law. Per Wisconsin Watch, the passage of these laws will free up $78.7 million in federal construction aid to add more Level 3 charging stations throughout the state. These can charge passenger electric vehicles in less than an hour. According to Wisconsin Transportation Secretary Craig Thompson, EV drivers will soon never be more than 25 miles away from a charger.
Aside from some favorable legislation in recent months, LNT is also committed to heavily investing in capital spending. Between now and 2027, the company anticipates that it will spend $9.1 billion on renewables and battery storage, electric distribution, gas generation, and gas distribution projects. These projects are expected to help LNT's rate base expand by 8% annually from $13.3 billion in 2023 to $17.9 billion by 2027.
This is why I believe the analyst predictions beyond 2024 are also realistic. For 2025, the FAST Graphs analyst consensus is for diluted EPS to rise by 6.5% to $3.26. In 2026, another 6.6% growth in diluted EPS to $3.47 is being predicted.
LNT also has the resources to make its capital spending plans a reality. This is because it enjoys an A- credit rating from S&P. That's how earlier this month, the company secured $375 million in capital through the issuance of three-year notes at 5.4%. Relative to the current three-year U.S. Treasury yield of 4.7%, that is an excellent spread for LNT (unless otherwise sourced or hyperlinked, all details in this subhead were according to LNT's Q1 2024 Earnings Press Release, LNT's Q1 2024 Earnings Presentation, and LNT's May 2024 Investor Presentation).
Fair Value Is Approaching $60 A Share
LNT's intriguing operating fundamentals aren't the only appeal to the stock. Shares look to be a decent value here at the current $50 share price (as of June 7, 2024).
LNT's current-year P/E ratio of 16.4 is meaningfully below the 10-year normal P/E ratio of 20.2 per FAST Graphs. That being said, I don't think a return to a valuation multiple of 20 is on the table. This would be a valuation re-rating two standard deviations higher than the present.
However, I believe a return to a valuation multiple one standard deviation above current levels is justified by the fundamentals - - or 18.1. On one hand, the interest rates that buoyed LNT to a 20 valuation multiple are probably gone.
On the other hand, LNT's three-year forward annual diluted EPS growth consensus of 7% represents an acceleration against the 10-year normal growth rate of 6%.
The current calendar year is nearly 56% complete. That leaves 56% for this year and another 44% for 2025 ahead in the next 12 months. This is how I'm weighing the respective $3.06 and $3.26 diluted EPS predictions for 2024 and 2026. That yields a 12-month forward diluted EPS input of $3.15.
Applying an 18.1 valuation multiple, I get a fair value of $57 a share. This would equate to a 12% discount to fair value from the current share price. If LNT meets growth expectations and returns to my fair value multiple, it could generate 35% cumulative total returns by the end of 2026.
Healthy Dividend Growth From A Soon-To-Be Dividend Aristocrat
In my view, LNT is an attractive dividend stock. The company's 3.8% forward dividend yield seems pedestrian stacked up to the 4% median forward yield of the utilities sector. This is why Seeking Alpha's Quant System awarded LNT a C+ grade for forward dividend yield.
LNT's yield coupled with its dividend growth prospects is solid to me. In the past five years, LNT's dividend has compounded by 6.2% annually in the past five years per the Quant System. That is 100 basis points above the utilities sector median.
In the years to come, I believe that this same level of dividend growth will persist. This is supported by a sustainable payout ratio.
In 2024, LNT is on schedule to pay $1.92 in dividends per share. Compared to the company's range of guidance, that would be a low-to-mid 60% payout ratio.
This is within the 60% to 70% payout ratio that the company is targeting. It's also better than the 75% payout ratio that rating agencies prefer from utilities per the Zen Research Terminal.
That's why I believe dividend growth will be at least as fast as earnings growth for the next few years. This leaves LNT on track to still become a Dividend Aristocrat in 2028.
Risks To Consider
LNT appears to have an electrifying future ahead of itself. However, it is still subject to risk. Since there have been no new risks identified by the company in its Q1 2024 10-Q Filing, I will rehash a few from past articles.
As a utility, LNT's growth prospects depend on its ability to complete projects within budget and on time. If the company encountered any regulatory setbacks on key projects, this could hurt its fundamentals.
Another risk to LNT is natural disasters. The natural disaster profile of the Midwest is relatively tame versus other regions of the United States. But there are no guarantees that significant natural disasters will never happen.
If LNT were found liable for any wildfires or natural gas explosions, that could result in significant liabilities. If severe enough, it could even result in a downgrade of its credit ratings. That could diminish the company's ability to fund all of its anticipated growth spending as well.
Summary: My Kind Of Boring
My 0.5% weighting of LNT in my portfolio is modest, but it is a nice and steady company that I'm glad to own. It's a get-rich-slowly type of pick for my money. The combination of a nearly 4% yield, 6% to 7% annual earnings growth, and undervaluation could make LNT a clear and simple way to indirectly cash in on AI.
Kody's Dividends
Hi, my name is Kody. Aside from my five to six weekly articles here on Seeking Alpha, I am also a contributor to Dividend Kings and iREIT on Alpha. I have been investing since September 2017 and interested in dividend investing since about 2009.Since July 2018, I have ran Kody's Dividends. This is a blog that is documenting my journey towards financial independence using dividend growth investing as the means to transform the dream of financial independence into a reality. It's also the inspiration of my pseudonym here on Seeking Alpha.By God's grace, I owe everything to my blog for introducing me to the Seeking Alpha community as an analyst. That's my story and I hope you enjoy my work examining dividend growth stocks and the occasional growth stock!
Analyst’s Disclosure: I/we have a beneficial long position in the shares of LNT either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
