Alliant Energy: Buy This For Growing Passive Income, Strong Returns

Alliant Energy's non-GAAP EPS payout ratio will edge slightly higher in 2023. See why I rate LNT stock a buy for dividend growth investors.

Alliant Energy: Buy This For Growing Passive Income, Strong Returns

Growing a large number of coins. FPM When done correctly and with enough time, dividend-growth investing can help ordinary investors reach financial independence. Financial independence is the amount of income an investor receives in dividends (or other passive income) that exceeds their annual expenses.
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Alliant Energy (NASDAQ :LNT) is one dividend growth stock that I think all dividend growth investors should buy. Let's review the company's valuation and fundamentals for the first time since April's article. This will help you understand why I consider it a buy recommendation for dividend growth investors. Alliant Energy's next dividend hike will be announced in two weeks. The company will increase its payout for 20 years consecutively.
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This establishes Alliant Energy as a Dividend Competitor and positions the electric utility for becoming a Dividend Aristocrat towards the end of the decade. Alliant Energy's dividend yield of 3.09% is roughly in line with the industry average of 3.11%. The stock isn't a yield trap so the dividend is unlikely to be cut.
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Alliant Energy expects a midpoint non-GAAPEPS of $2.795 in 2022 ($2.76 to 2.83). This is a 61.3% payout rate, compared to the $1.71 per share in dividends that the company received for the year. This is well within Alliant Energy’s 60-70 percent target payout ratio (according slide 5 of the Alliant Energy November 2022 Investor Presentation).
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The company also issued non-GAAP midpoint EPS guidance at $2.89 for 2023 ($2.82 - $2.96). This would be a manageable 62.6% non GAAP EPS payout ratio when compared to the $1.81 dividends per share expected to be paid in 2023. Alliant Energy's payout ratio is not guaranteed to grow, but earnings are expected to increase by 6% annually.
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This is why I believe that a 6.75% annual growth rate in dividends is possible over the long-term. Alliant Energy is a steady grower Alliant Energy Q3 2022 Earnings press release. Alliant Energy had a strong year through at least the first three quarters. Through Sept, the company's total revenues increased by 14.8%
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To $3.1 billion, 30 more than the previous year. Alliant Energy saw double-digit growth in its gas and electric segments, which drove the increase in year-to date revenue. The company saw an increase in demand for electricity as well as its customer base. As a result, its year-to-date sales of electric megawatt-hours grew by 3.3% to 24,511
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This segment saw respectable revenue growth when it was paired with higher electricity rates. Alliant Energy's utility gasoline sales increased 12.2% year-over-year to 120,525 Dekatherms. This was in addition to higher gas rates which led to mid-double-digit revenue growth for the gas segment.
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Alliant Energy's non-GAAP year-to-date EPS was 2.6% higher at $2.34 Non-GAAP revenue growth was slowed by sharp increases in electric production fuel, purchased power expense and cost of gasoline sold expense. Alliant Energy anticipates a $2.795 midpoint non-GAAP earnings per share for 2022, which is 6.3% more than 2021's base rate of $2.63. (All details are in the subheading to Alliant Energy Q3 2022 earnings release and Alliant Energy Qu4 2021 earnings release).
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Alliant Energy is a successful utility. The company is not without risks. The Federal Reserve raises interest rates in an effort to combat inflation.
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Analysts predict that the Fed funds rate will reach 5% by 2023. Alliant Energy will allocate $8.5 billion to capital expenditures over the next four-years (sourced slide 17 of Alliant Energy November 2022 Investor presentation). However, if regulators don't give the company the green light to pass higher interest costs to customers, the company could be in trouble in the short term
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Alliant Energy faces another risk: if the Federal Reserve mismanages its monetary policy, it could lead to the economy sinking into recession. If this were to happen, it would be a disaster for the company's commercial and industrial customers. Alliant Energy is a slow-growing business, so it's important not to overpay for ownership stakes.
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To estimate the fair value of Alliant Energy shares, I will be using two valuation methods. Investopedia I will use the dividend discount model (or DDM) to value Alliant Energy's shares. It consists of three inputs. The expected dividend per share is the first input to the DDM. This is also a term for the annualized dividend.
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This amount will soon reach $1.81 so I will use it for this input. Next is the cost capital equity. This is the annual total return rate an investor needs from their investments. Personal preference: 10% annual total returns
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The long-term DGR, or annual dividend growth rate, is the final input to the DDM. I believe that an annual dividend growth rate of 6.75% is possible, as I mentioned in the dividend section. These inputs are plugged into the DDM and I get a fair price of $55.69 per share
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Alliant Energy shares are currently trading at a 0.6% discount on fair value. This means that they offer 0.6% upside over the current $55.35 per share price (January 6, 2023). Money Chimp I will use the DCF or discounted cash flow model to estimate the fair value Alliant Energy shares. It also includes three inputs
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Earnings over the past four quarters are the first input to the DCF model. This amount is $2.69 in the case Alliant Energy. Growth assumptions are the second input to the DDM.
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For the next five year, I will assume an annual non-GAAP growth rate of EPS at 6% and then 5% for each subsequent five years. The discount rate is the third input to the DCF model. This input will be used again at 10%
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These inputs are used to calculate the DCF model's fair value output at $58.99 per share. Alliant Energy shares are priced at 6.2% below fair value. This can allow for 6.6% capital appreciation over the current share price. These two fair values are combined to give me a fair value for $57.34 per share.
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Alliant Energy shares trade at a 3.5% discount on fair value, and offer a 3.6% upside over the current share price. Summary: Proven Dividend Growth Stock with Decent Total Return Potential. To raise a dividend for two consecutive generations, you need to be of the highest quality. Alliant Energy is able to provide this quality for its shareholders.
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The company's dividend is well covered and its earnings are continuously growing. Alliant Energy shares trade at about a 3% discount to their fair value, which is the cherry on top. The company's combination of yield, growth potential and small valuation upside could result in double-digit annual total returns over five to ten years.
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Alliant Energy is an attractive choice for dividend growth investors who don't want to sacrifice total returns.