AGL Energy Ltd shares surge on buyback & profit guidance: Is it a buy?

Credit: Pink Sherbet Photography

The best performing share on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) today has been Australia’s largest retail energy generator and seller AGL Energy Ltd (ASX: AGL).

Its shares are up 5% today following the release of its FY 2017 earnings guidance ahead of its annual general meeting.

The release revealed that management expects underlying profit to be between $720 million and $800 million in FY 2017. This equates to growth of 2.7% to 14.1% on FY 2016’s underlying profit result of $701 million.

The catalyst for this underlying profit growth is expected to come from improvements to wholesale electricity margins, continued execution of the customer value strategy, and the successful delivery of operational transformation targets.

Judging by the market’s positive reaction today, investors may be expecting profit to come in at the higher end of the guidance range.

But another reason the shares may be climbing higher could be related to a further announcement released this morning which reveals the company is planning to increase its dividend payout ratio and undertake an on-market buy back of $596 million worth of its shares.

Starting with FY 2017’s interim dividend, AGL Energy is targeting a payout ratio of approximately 75% of underlying profit and a minimum franking level of 80%.

For the buyback the company has asked Citi to jump into the market to buy back up to 33.7 million of its shares over the coming year as part of AGL’s ongoing capital management program according to the Australian Financial Review.

Because of this buyback, its defensive qualities, and its generous dividend payout ratio I believe AGL Energy represents a solid investment option today. Furthermore with its shares changing hands at just 16x estimated FY 2017 earnings, it is priced at a reasonable discount to its peers APA Group (ASX: APA), AusNet Services (ASX: AST), and DUET Group (ASX: DUE).

If you need to make room for it in your portfolio then I would highly recommend removing these three wealth destroying shares. Each could be harming your portfolio today and might be best taken out.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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