I have been both right and wrong about AGL Energy Ltd (ASX: AGL) over the past few years. I thought it was a good opportunity at around $11 after its capital raising, then not so good an opportunity at around $18. I was wrong on that last one, but that didn't stop my eyebrows lifting skywards this morning when I saw shares trading at $25.
The big question is: Is it worth it?
On the face of it, the company has reliable earnings, a reasonable balance sheet, and minimal growth prospects. With profits forecast by management to be 'towards the upper end' of guidance between $720 million and $800 million for the current full year, AGL Energy appears priced at a minimum of 21 times earnings.
I think that's starting to get lofty for a utility company in a competitive environment with minimal growth prospects in its electricity retailing business. AGL faces firm competition from the likes of Origin Energy Ltd (ASX: ORG), which is also re-focusing on its retailing, as well as competition from trends such as home-generation and power storage. AGL is investing in renewable energy, yes, but also carries heavy future liabilities associated with the closure of coal power plants, although this is likely decades away.
We have seen in South Australia recently that the movement towards renewable energy has not been well thought through and there is a good case for continued use of coal generation, supporting AGL. The company also appears to be operating well under its new management, and news of a share buyback has definitely boosted the share price.
However, I struggle to see the value in the company today. AGL might appear a long-term, reliable dividend payer, but at today's prices ($25) and dividend yields (3%) I don't think investors are being compensated enough to make the company a buy.
