Ameren Earnings: 1 Dividend That's Here to Stay

Ameren (NYSE: AEE  ) reported earnings this week, whiffing on revenue and underwhelming on earnings. But with a 4.8% dividend yield and a rate increase in the bag for 2013, now might be the perfect time to add Ameren to your portfolio. Let's look at this quarter's earnings and some longer-term trends and decide for ourselves whether Ameren is a buy.

Number-crunching
On the top line, Ameren reported $1.5 billion in sales, down 4.4% from Q4 2011 and almost 15% below analyst expectations. But falling revenue is a sectorwide trend for utilities this quarter and is not necessarily reflective of a failing corporation.

Where Ameren's earnings do hit hard is the company's $0.14 EPS. Although this mirrors its Q4 2011 earnings, it comes in a whopping 30% below Mr. Market's estimates.

For 2012 overall, Ameren recorded $2.42 in adjusted EPS, delivering on both its year-ago guidance range and its November 2012 estimate. These newest numbers are 5.5% below 2011's earnings, primarily because of the utility's merchant generation division.

From generation to regulation
There's good news and bad news. The good news is that Ameren announced last December that it will exit the merchant generation business in 2013. The bad news is that the utility's recording a $1.5 billion to $2 billion non-cash impairment charge to cut the cord. In 2012 alone, its generation adjusted earnings dropped more than 40% to $0.17 per share because of lower power prices and higher fuel costs. Rather than pouring profits into its five coal-fired and three gas-powered power plants, Ameren is bowing out and focusing entirely on its regulated business.

This radical move shows just how uncertain utilities are about which energy sources will win out. Once all the coal dust has settled, Duke Energy (NYSE: DUK  ) will have spent around $12.5 billion in capital expenditures to modernize its out-of-date energy portfolio. Likewise, Southern Company (NYSE: SO  ) recently navigated regulatory waters to win approval for two new nuclear reactors, the first such approval in more than 30 years.

Moving forward, an investment in Ameren will be an investment in this company's regulatory environment. Historically, the utility has had mixed success in this department. In the past year, a $250 million annual rate increase in Missouri helped push its revenue higher, while lower allowed ROE and required nonrecoverable donations in Illinois pulled this state's profits down. Ameren is going on the offensive in 2013, requesting a $50 million annual natural gas rate delivery increase for Illinois.

The utility is also taking a page out of American Electric's (NYSE: AEP  ) playbook by focusing on its transmission division. Ameren is planning to invest $2.2 billion in the next four years to modernize its aging infrastructure. While it's not as hefty as American's $1.7 billion for 2012 alone, both utilities have recognized the benefit of investing in transmission.

Dividend dealing
Utilities have historically offered some of the most stable dividends around, but that's all changing as companies dish out dollars to readjust their energy portfolios. Exelon (NYSE: EXC  ) recently announced that it's cutting its dividend by 40% to clear cash for its nuclear and renewable-energy investments.

Ameren's 4.8% yield is above average for utilities and has significant staying power. Ameren made a smart move to slash its dividend in 2009, and it currently enjoys one of the lowest cash-flow-positive dividend payout ratios around:

AEE Cash Div. Payout Ratio TTM Chart

AEE Cash Div. Payout Ratio TTM data by YCharts.

What awaits Ameren?
Looking ahead, the company expects 2013 diluted EPS between $2.00 and $2.20. This range reflects a slight 2% dip in regulated utilities earnings but is primarily representative of an expected $0.15 loss for its generation division.

Selling power plants is never easy, and Ameren's near-term profitability will depend on how successfully it can shave off its generation assets -- before they become liabilities. On the long-term horizon, Ameren has put itself at the whims of regulators, but it's now in a position to pull in more stable sales and profit than ever before. With its sustainable 4.8% dividend yield and an eye toward transmission growth, things are looking up for this utility's 2013.

But Ameren isn't the only dividend-dealing utility with a strategy up its sleeve. As the nation moves increasingly toward clean energy, Exelon is perfectly positioned to capitalize on having the largest nuclear fleet in North America. Combine this strength with an increased focus on renewable energy, and Exelon's recent merger with Constellation places Exelon and its best-in-class dividend on a short list of top utilities. To determine whether Exelon is a good long-term fit for your portfolio, you're invited to check out The Motley Fool's premium research report on the company. Simply click here now for instant access.


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