We have seen weakness across sectors which are sensitive to rising bond yields – such as property, utilities and transport industrials (example airports, rail and tollroads). When considering yield stocks in this environment, it is important to consider the growth profile as well.
AGL Energy at these levels is beginning to look attractive. AGL Energy is an integrated energy company and owner, operator and developer of renewable energy generation in Australia.
It has a diverse power generation portfolio including base, peaking and intermediate generation plants, spread across traditional thermal generation as well as renewable sources including hydro, wind, landfill gas, solar and biomass.
The Company has three operating segments which are Energy Markets, Group Operations and Investments. Currently AGL has approximately around 3.6 million customers in Eastern Australia. The company is transitioning away from traditional coal-fired power stations to lower-emissions generation technology.
Given the significant fall in AGL’s share price of late, I believe this represents a good entry point and exposure to a company providing essential services and where earnings should prove relatively resilient.
We believe the lower share price reflects the current regulatory environment and implications from retail competition on margins.
Although we expect electricity prices to moderate from existing high levels with the rise of lower costs of renewable energy and regulatory oversight, wholesale electricity prices should still remain high by historical standards underpinned by gas prices which continue to go up.
In addition to this, I expect dividend growth to continue. Management has declared a dividend payout policy of 75 per cent of underlying profit after tax at a minimum franking ratio of 80 per cent.
A relatively low net debt-to-equity ratio and strong cash-flow generation has led to DPS growth of more than 9 per cent p.a. in the past five years.
Valuation looks attractive given AGL’s growth profile.
AGL retains a strong balance sheet and flagged it has $2.7 billion of headroom up from $2.4b as at 2017 so this is a positive. Management maintained underlying NPAT guidance of $940-$1,040m at its 1H18 result Policy certainty around the National Electricity Guarantee (NEG) is a key catalyst for AGL.
The crust of the policy is focused on energy reliability, emissions and affordability with the hope of reducing wholesale energy prices over time.
The NEG will firmly place the burden on energy retailers to meet the guarantees via contracts with generators while adhering to an emission intensity target which could lead to market distortions and added power to the incumbents (example AGL and Origin Energy).
Further announcement around capital spend and in August 2018 when AGL unveils its cost-out programme (which may be higher than what the market expects).
- This article does not take into account the investment objectives, financial situation or particular needs of any particular person. Accordingly, before acting on any advice contained in this article, you should assess whether it is appropriate in light of your own financial circumstances or contact your financial adviser. Christopher Hindmarsh is an adviser at JBWere Limited, owned by NAB.
AGL Energy is an integrated energy company and owner, operator and developer of renewable energy generation in Australia. It has a diverse power generation portfolio including base, peaking and intermediate generation plants.
