Ameren Corporation: The Real Rewards Are In The High-Yield Preferred Shares

Core Viewpoint - Ameren Corporation is facing challenges in a tough regulatory environment in Illinois, which has negatively impacted its stock performance compared to the broader utility sector. Despite being slightly undervalued, the company's dividend yield is less attractive compared to competitors, leading to a preference for its preferred shares among income investors [2][3][21]. Company Overview - Ameren Corporation operates as a utility holding company with 2.4 million electric customers and 900,000 gas customers across four business segments in Missouri and Illinois. The company has a total generating capacity of 10,200 megawatts, with 10% coming from its Callaway Nuclear Plant [1]. Financial Performance - In 2023, Ameren's shares declined by 21.6%, significantly underperforming the S&P Utility Index, which fell by 7.1%. This decline was primarily due to the rejection of new grid plans by the Illinois Commerce Commission [2]. - The current share price of Ameren is $69.40, reflecting a P/E ratio of approximately 14.8, which is slightly undervalued by about 5$4.30 to $4.45, with a forecasted EPS growth of 6.0-8.0$0.63, yielding 3.63%. The company expects annual dividend growth of 6-8%, aligning with earnings growth. However, the dividend yield is considered unexciting compared to competitors [4][6]. - The company has a target payout ratio between 55% and 70%, currently operating at the lower end of this range, indicating potential for higher dividends in the future [6]. Regulatory Environment - The regulatory environment in Illinois is challenging, with the Illinois Commerce Commission approving low returns on equity for Ameren and rejecting proposed rate increases. This has resulted in Ameren having some of the lowest electric rates in the country [15][17]. - Ameren's allowed return on equity for its Illinois operations is significantly below the national average, which may limit its financial performance [17]. Transition to Renewables - Ameren aims for net-zero emissions by 2045, ahead of the 2050 target set by the Inflation Reduction Act. The company plans to invest $48 billion in infrastructure development from 2023 to 2032, with a significant reduction in coal revenue expected by 2027 [18][19]. - The company is also expanding its renewable energy portfolio, with plans to add 2,700 megawatts of wind and solar capacity by 2037 [19]. Preferred Shares - Ameren offers a variety of preferred shares with yields exceeding 6%, which are considered more attractive for income investors compared to the common shares. These preferred shares are thinly traded but may provide better returns as interest rates fluctuate [7][21].