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Should you buy AGL Energy?

The regulation of electricity prices in Queensland has been among the factors weighing heavily on electricity retailers over the last 12 months. While the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has shot up 21%, shares in electricity producers and retailers like AGL Energy (ASX: AGK) and Origin Energy (ASX: ORG) have hardly moved.

Shares in Origin have increased just 2.3% in the last year, while AGL has gone nowhere and freshly listed New Zealand electricity company Mighty River Power (ASX: MYT) has dropped below its listing price in just three weeks. But as valuations of other major companies rise, these unloved laggards just might be a golden long-term investment opportunity.

AGL in particular has some very positive characteristics. AGL is one of three big energy providers in Australia, competing with Origin and Energy Australia (formerly TRUenergy) owned by Hong Kong listed CLP Group (SEHK: 0002).

The company released a strong half-year 2013 result in February, increasing underlying profit by 20% with the benefit of a newly acquired power station and despite a $29 million hit from Queensland Competition Authority’s change to the way electricity pricing is set in the state. Full year 2012 underlying profit grew 11.8% and the company grew customers across both periods.

One key factor weighing down AGL is the expected impact of the government’s carbon pricing scheme. AGL expects direct emissions liability of approximately $650 million for the 2013 financial year. It’s a huge liability, but to reduce the burden AGL has invested heavily in renewable energy through wind and hydro electricity generation.

The company’s Macarthur Wind Farm was opened in April and holds 140 wind turbines capable of powering more than 220,000 homes in Victoria. It is the largest wind farm in the Southern Hemisphere. AGL is also engaging in a $450 million solar energy project in conjunction with the Commonwealth which is scheduled to begin construction in mid 2014.

Foolish takeaway

AGL has warned of volatile earnings over the next year as issues in retail electricity pricing drive an increasingly competitive and cut-throat market. However the company’s long-term investment in renewable energy and attractive 4.2% dividend yield may make it a positive portfolio addition on any dips in price.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.

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