As someone who consumes a decent amount of content on YouTube, I’ve noticed these “fail vlogs” seemingly catching on and getting pushed by the algorithm.
People who have ostensibly failed in some way (or many ways) in life make YouTube videos in an apparent bid to use their troubles (real or faked) as a springboard for vitality and views.
Instead of one or two cautionary tales, it’s entire channels repeatedly pushing failure as a monetized theme.
But there’s a much better way to recover from financial setbacks, and this method is also a fantastic way to avoid financial failure in the first place.
What I’m referring to is living below your means and intelligently investing the savings for the long term.
It’s pretty much undefeated over time in terms of securing financial security and freedom.
And when I think of intelligent investing, my mind immediately goes to dividend growth investing.
This is a long-term investment strategy whereby one buys and holds shares in world-class businesses paying out safe, growing cash dividends.
Hundreds of such businesses are listed on the Dividend Champions, Contenders, and Challengers list – a curated compilation of US-listed businesses that have raised dividends each year for at least the last five consecutive years.
Instead of making poor choices and then trying to monetize them via YouTube videos, I’ve spent the last 15+ years using the dividend growth investing strategy to build the FIRE Fund.
That’s my real-money portfolio generating enough five-figure passive dividend income for me to live off of.
This allowed me to claim financial independence and even retire in my early 30s.
Now, the Fund wasn’t built randomly.
Instead, the best businesses were invested in at the best valuations.
And that’s because price is only what you pay, but value is what you actually get.
An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.
This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.
Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.
That higher yield correlates to greater long-term total return potential.
This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.
Prospective investment income is boosted by the higher yield.
But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.
And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.
These dynamics should reduce risk.
Undervaluation introduces a margin of safety.
This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.
It’s protection against the possible downside.
I’d recommend monetizing success rather than failure, and doing so by steadily buying undervalued high-quality dividend growth stocks on the way to financial freedom is a fantastic way to do that.
Now, being able to tell whether or not something is undervalued does require a base of knowledge around this subject.
This is why Lesson 11: Valuation is so valuable.
Written by fellow contributor Dave Van Knapp, it’s a valuation guide that deftly explains what valuation is all about and even provides valuation tools to use on your own.
With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…
Ameren Corp. (AEE)
Ameren Corp. (AEE) is an American power company.
Founded in 1997, but with roots dating back to the 1920s, Ameren is now a $28 billion (by market cap) major power player employing around 9,000 people.
Ameren is a holding company operating regulated electric and natural gas utilities in the states of Illinois and Missouri.
It serves 2.5 million electricity customers and 900,000 natural gas customers across its two territories.
The company’s two main sources of power generation are coal (approximately 57%) and nuclear (approximately 19%).
As I’ve said before, power utilities make for appealing long-term investments.
They are in the business of providing something (i.e., power) that people cannot live without in a modern-day society.
Moreover, any service territory typically has only one power provider, creating a local monopoly over this power.
Therefore, the company has captive customers who are highly incentivized to keep buying power and paying their utility bills.
If one is looking for predictable, resilient, recurring revenue, it doesn’t get much more obvious than this.
However, because it’s almost too easy for a utility company to take advantage of this position, government regulators are in place to keep a lid on the rates that can be charged.
On the flip side, regulators tend to allow for reasonable rates of return on infrastructure investments, nearly guaranteeing some level of profit for any public power utility in the US.
Combining this regulation with monopolistic control over necessary power is how Ameren is able to rack up consistent growth across its revenue, profit, and dividend.
Dividend Growth, Growth Rate, Payout Ratio and Yield
To that point, Ameren has increased its dividend for 13 consecutive years.
Its 10-year dividend growth rate of 5.5% is okay, but what’s more interesting is the acceleration in dividend growth.
For instance, the five-year dividend growth rate is 7.3%, which is borderline outstanding for a power utility.
And this comes on top of the stock’s market-beating 3% yield.
That yield, by the way, is 20 basis points higher than its five-year average.
The payout ratio, which is 56.1%, is also on the low side for a power utility, so I see above-average growth and safety at the expense of a yield that’s not quite as high as what some other names offer right now.
For those who like their utility holdings to have a bit more pep in the compounding step, Ameren looks pretty interesting.
Revenue and Earnings Growth
As interesting as it may be, though, this is largely based on prior results.
However, investors must constantly be envisioning the results to come, as today’s capital ultimately gets risked for tomorrow’s rewards.
As such, I’ll now build out a forward-looking growth trajectory for the business, which will be instrumental for the valuation process.
I’ll first show you what the business has done over the last ten years in terms of its top-line and bottom-line growth.
And I’ll then reveal a professional prognostication for near-term profit growth.
Lining up the proven past with a future forecast in this manner should give us a base to work with and approximate where the business might be going from here.
Ameren raised its revenue from $6.1 billion in FY 2016 to $8.8 billion in FY 2025.
That’s a compound annual growth rate of 4.2%.
Good stuff.
This is right about what I’d expect out of a regulated utility.
Meanwhile, earnings per share grew from $2.68 to $5.35 over this period, which is a CAGR of 8%.
That’s elite.
It’s rare to see a power utility compound its bottom line at 8%.
Very impressive.
Looking forward, CFRA believes that Ameren will deliver high-single-digit EPS growth over the near term.
CFRA has 2027’s operating EPS at $5.81, which implies a 7%+ CAGR between now and then off of 2025’s base of $5.03.
It’s basically more of the same, and the same is pretty terrific.
I actually see some upside optionality here, as Missouri has been seeing demand for data center buildouts.
As is, Ameren has a $31.8 billion CapEx plan from 2026 to 2030, which promises to bring nearly 3 gigawatts of power online and meet rising demand from existing customers and new industry (including those data centers).
I don’t see anything to indicate that Ameren can’t or won’t continue on its existing earnings trajectory, which sets the dividend up for a similar type of growth rate.
That paints a picture of high-single-digit dividend growth on top of a 3% yield, which adds up to a 10%+ annualized total return over time.
Coming out of a business with this level of durability and visibility, it’s hard not to like that.
Financial Position
Moving over to the balance sheet, Ameren has a fairly standard financial position.
Its long-term debt/equity ratio is 1.3, while the interest coverage ratio is 3.
It also holds credit ratings well into investment-grade territory: Baa1, Moody’s; BBB+, S&P.
Regulated power utilities rely on debt and equity to fund investment/growth projects, so leverage is common across the space.
I don’t see anything out of ordinary here when it comes to the balance sheet.
Profitability is strong.
Return on equity has averaged 10.8% over the last five years, while net margin has averaged 15.4%.
Ameren’s ROE is on the higher end of what I’ve seen from a regulated American power utility, indicating a favorable regulatory environment.
Moreover, the ROE has been steadily climbing throughout the last decade.
Overall, Ameren strikes me as an above-average power utility business looking at above-average prospects over the coming years.
And with economies of scale, a geographic monopoly over its territory, beholden customers, and a regulatory framework that just about guarantees some level of profit, the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Litigation, regulation, and competition are omnipresent risks in every industry.
Regulation is a double-edged sword: Regulators allow for utilities to make a reasonable profit, where profit scales with costs, putting a profit floor in place; however, because electricity is a basic necessity and there’s often only one power provider in any one geographic area, regulators put a profit ceiling in place by limiting the rates a utility can charge.
This is a rare industry in which competition at a local level doesn’t really exist, as Ameren has a monopoly across its service territory, but it is possible that customers will become future competitors by generating power at the site of consumption (via solar).
Ameren is dependent on the evolving regulatory structure and population growth of its territory, but the regulatory framework appears favorable and data center bailouts bode well.
The company faces risks from nuclear power generation.
There is limited natural disaster risk present, although the Midwest does get occasional blizzards and tornadoes.
I’m not seeing any extraordinary risks here.
But the valuation appears better than ordinary after a recent 15% drawdown in the stock’s pricing…
Valuation
The P/E ratio is now at 17.8, which is noticeably lower than its five-year average of 20.3.
The cash flow multiple of 8 is slightly below its five-year average of 8.2.
And the yield, as noted earlier, is higher than its own recent historical average.
So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?
I valued shares using a dividend discount model analysis.
I factored in a 10% discount rate and a long-term dividend growth rate of 7%.
This dividend growth rate appears to be easily achievable for Ameren, given the recent acceleration in dividend growth, the demonstrated EPS growth over the prior decade, the expectation for near-term EPS growth, and the flexible payout ratio.
When looking at the totality of the business, Ameren is one of the better power utility businesses I’ve come across and see it as easily capable of putting up better numbers than the average player.
There simply aren’t any clear roadblocks in the way, clearing the business for excellent results over the coming years.
The DDM analysis gives me a fair value of $107.00.
The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.
The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.
It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.
I find it to be a fairly accurate way to value dividend growth stocks.
I’m seeing some modest undervaluation present.
But we’ll now compare that valuation with where two professional stock analysis firms have come out at.
This adds balance, depth, and perspective to our conclusion.
Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.
1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.
Morningstar rates AEE as a 4-star stock, with a fair value estimate of $108.00.
CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.
They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.
CFRA rates AEE as a 4-star “BUY”, with a 12-month target price of $122.00.
I’m almost bang on with where Morningstar is at. Averaging the three numbers out gives us a final valuation of $112.33, which would indicate the stock is possibly 10% undervalued.
Bottom line: Ameren Corp. (AEE) is a great American power utility business firing on all cylinders. I see above-average growth, profitability, and financial strength. With a market-beating yield, high-single-digit dividend growth, a relatively low payout ratio, more than 10 consecutive years of dividend increases, and the potential that shares are 10% undervalued, this looks like a great idea in the utility space for long-term dividend growth investors.
-Jason Fieber
Note from D&I: How safe is AEE‘s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 69. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, AEE’s dividend appears Safe with an unlikely risk of being cut. Learn more about Dividend Safety Scores here.
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
Disclosure: I have no position in AEE.
