Update: Allete Reported Strong Q2 Revenue Growth And Rising Earnings

| About: ALLETE, Inc. (ALE)

Summary

Revenues grew 10.7% Y/Y, GAAP EPS rose 20% Y/Y despite one-time charges. Quarterly dividend remains unchanged at $0.49 per share, yielding 4.1% annualized.

The long-term thesis has been working as expected, with ALLETE continuing to be a stable 4% dividend yielder, raising its dividend earlier in the year.

I reiterate my long thesis and set a $52 target price achievable within 12 months, offering a ~8% upside plus 4.1% dividend yield on very low volatility.

ALLETE, Inc. (NYSE:ALE) reported strong revenue growth and rising earnings results for the second quarter of 2014 (SEC filing, conference call, press release). Revenue rose by 10.7% Y/Y to $260.7M. Diluted EPS was $0.40 on net income of $16.8M, versus $0.35 EPS on net income of $14.0M a year ago. This year included a non-recurring Environmental Protection Agency (EPA) settlement after-tax charge of $0.06 per share. I terms of segments, the net income at ALLETE's regulated operations rose to $17.5M compared to $16.3M a year ago despite the aforementioned EPA charge. The net income increase was primarily due to higher cost recovery revenue as a result of ongoing work on the Boswell 4 environmental retrofit and Bison 4 wind energy projects. Electric sales were similar to the second quarter of 2013, and reflected continued strong demand from Minnesota Power's industrial customers. The investments and other segment reported a net loss of $0.7M for the quarter, an improvement of $1.6M Y/Y. ALLETE Clean Energy posted a profit from its newly acquired wind energy facilities in Minnesota, Iowa and Oregon. Results at BNI Coal and ALLETE Properties were similar to the second quarter of last year.

In terms of outlook, the demand nominations recently received by ALLETE show continued operation at full capacity of ALLETE's taconite customers for the rest of 2014. The full year earnings guidance range remains unchanged at $2.75 to $2.95, excluding 3 cents per share of costs recorded in the first quarter associated with an ALLETE Clean Energy acquisition, and this quarter's non-recurring $0.06 per share charge associated with the EPA settlement.

ALLETE continues to be a solid buy-and-hold dividend utility stock, currently yielding over 4% on very low stock price volatility. I reiterate my long thesis and set my target price to $52 per share, offering a ~8% upside within 12 months plus the 4.1% dividend yield. Also, the stock should offer a long-term 6% to 8% total annual return for many years to come. With 90 years of family-owned history, this utility is a true sleep-well-at-night stock.

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