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AGL back on track

For much of the last 12 months, AGL Energy (ASX: AGK) has outperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO), but the last quarter saw the index improve substantially while AGL pulled back by over 10%. However that trend has now reversed and AGL’s share price is once again around $15, making the one-year return virtually identical to the index.

AGL is a major energy company generating power and supplying customers throughout the eastern states. AGL operates both on the ‘demand’ side of the energy business servicing over 3.5 million customers, and on the ‘supply’ side with a diverse power generation capability. Its earnings are evenly split between these two activities.

AGL is the second largest energy retailer in Australia (behind Origin Energy (ASX: ORG)) with about 27% of the market. It has electricity generation capacity of 6,000 MW utilising traditional coal fired power stations, plus a significant amount of renewable energy having invested $3 billion in various projects such as wind farms and solar photovoltaic over the last few years. AGL also supplies gas to 700,000 NSW customers and is active in new coal seam gas and liquefied natural gas projects. Large gas resources in Australia are being developed with an ever growing number of projects such as Woodside’s (ASX: WPL) Pluto in Western Australia and developments by Origin and Santos (ASX: STO) in the Surat and Bowen basins in Queensland.

Last year, while statutory profit fell, underlying profit increased by 11.8% to $482 million representing earnings per share of $1.00 and the company paid fully franked dividends of $0.61 per share.

Foolish takeaway

Retail energy prices are subject to regulatory risk and this may impact margins. AGL took on a lot more debt last year to buy the Loy Yang power station and struggles to achieve a decent return on funds invested.

If you only invest in one company this year, make it our “Top Stock for 2012-13.” Operating in two hot markets — one set to double by 2012, the other predicted to grow 5x over the next five years — this stock is a solid growth play that also boasts strong recurring revenue, zero debt, and lots of cash. Get its name and full research case in this brand-new FREE report.

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Motley Fool contributor Tony Reardon owns shares in Woodside. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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