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Why you should bet on Origin Energy Limited

Origin Energy Limited (ASX: ORG) has provided shareholders with impressive returns since its demerger from Boral Limited (ASX: BLD) in February 2000. Over that timeframe the stock is up 1,081%, in contrast the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has gained 72%.

Even for shareholders who did not own stock at the time of the demerger the returns have been exceptional. Over the shorter timeframe of 10 years shareholders have enjoyed share price gains of 163% compared with a return of 60% from the index.

Likewise the recent returns from Origin compared to rival AGL Energy Ltd (ASX: AGK) are favourable too. Since AGL’s listing in its current form in October 2006 the share price is essentially flat, resulting in the firm underperforming both the index’s 3% return and Origin’s 111% return.

To get an understanding of why Origin has been such a great investment for shareholders it is helpful to review the past.

The last decade

Origin boasts a very long-serving managing director for a company not controlled by a major shareholder. Current MD Grant King was previously the MD of Boral Energy prior to the demerger – a position he had held since 1994. Given that planning is an enormously important aspect for companies such as Origin that run significant and critical infrastructure the benefit of having a steady captain (MD) at the helm for so many years is definitely a positive attribute.

In fact much of what there is to like about Origin today is due to decisions made many years ago. For example the decision made back in 2003 to construct the BassGas Project is reaping rewards for investors today.

10 years ago Origin’s share price was around the $5.50 mark, revenues were $3.556 billion and Net Profit after Tax (NPAT) was $205 million. Earnings per share (EPS) were 30.9 cents and the company paid an annual dividend of 13 cents per share (cps).

Fast forward 10 years to 2014 and the company’s share price is near $14.50 and the firm is on track for revenues of close to $15 billion and an underlying NPAT of around $760 million. Analyst consensus estimates (from Morningstar) have EPS forecast at 68 cps and dividends at 50 cps for the current financial year.

Understanding the long-term planning which goes into a business such as Origin’s should give investors’ confidence the future outlook for Origin is good too.

The next decade

There are at least three major positives about the outlook for Origin over the next decade.

Firstly, projects set in motion over the past 10 years are set to reap benefits for shareholders over the next decade with the enormous Australia Pacific LNG Project of particular note – production is expected to begin in mid-2015.

Secondly, given the firm’s history of shareholder value creation, investors can have some confidence that decisions being made presently have a better than average chance of creating future shareholder value.

Thirdly, as Warren Buffett highlighted in his recent annual letter to the shareholders of Berkshire Hathaway, owning critical infrastructure assets allows you to prosper as a nation prospers. Origin is indeed well placed to grow as Australia grows.

Foolish takeaway

The scale of Origin’s asset base and its vertically integrated offering is an appealing mix. The company’s growth outlook is positive and the stock is trading on a forecast price-to-earnings ratio and dividend yield of 21 and 3.5% respectively. These metrics look appealing both relative to its peers and given the firm’s growth potential and quality.

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Motley Fool contributor Tim McArthur owns shares in Origin Energy Ltd.

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