Utility companies are often seen as some of the most stable, defensive businesses on the stock exchange because everyone needs power, right?
You have probably heard of these two Australian businesses and there's a good chance one of them is your utility company. But which one is the better investment?
AGL Energy Ltd (ASX: AGL) is Australia's biggest power utility company, it has a market cap of $12.8 billion. The other large ASX-listed power utility company is Origin Energy Ltd (ASX: ORG), which has a market cap of $9.7 billion. AGL is the winner here, but size doesn't mean much to us as investors when both companies are worth billions.
Dividend yield
One of the main reasons investors look at utility companies is the stable dividend. AGL has a grossed up dividend yield of 5.11%, whereas Origin has a yield of 5.65%.
Origin currently has the bigger dividend on offer, but Origin cancelled its final dividend. If the next interim dividend is cancelled it will have a 0% yield.
Dividend growth
AGL grew its dividend from $0.64cps in FY15 to $0.68cps in FY16 – a respectable 6% increase. AGL is expected to pay $0.84cps by FY18 (source:Commsec), this suggests AGL is trading on a forward (fully franked) dividend yield of 6.3%.
Origin cancelled their final dividend of FY16, so its total dividends shrank from $0.50cps in FY15 to $0.10cps in FY16.
AGL has been the more reliable dividend payer over the last 12 months.
Share price
Over the last 12 months Origin's share price has increased by 1% to $5.56. In the same time period AGL has increased by 19% to $19.11. Clearly, AGL shares have been the better performer. AGL is estimated to grow its earnings per share to $1.14 by FY17 so there's a chance that AGL will outperform again.
Valuation
AGL is currently trading at 16.7x FY17's estimated earnings, whereas Origin is trading at 16.8x. They're trading at virtually the same price, based on a future earnings multiple.
Being energy retailers, AGL and Origin are subject to the same risks and rewards outlined below.
The bull case
Energy prices, particularly gas, are predicted to rise in the short to medium term. Australia may soon have a shortage of gas, which would allow energy retailers to charge higher prices. Energy retailers have a profitable habit of being slow with price decreases, but quick with price increases.
Electric cars may be widespread in the coming years, as they become affordable for the average consumer. This is bad news for petrol company Caltex Australia Ltd (ASX: CTX), but potentially good news for AGL and Origin. All of these cars need to be recharged with electricity, which AGL and Origin provide.
The bear case
Households are generally using less energy than they used to. Energy efficient appliances, LED lights and other devices are reducing energy consumption. There's also a growing trend of installing solar panels (which get cheaper every year), further reducing the demand for retailer energy.
Energy is a commodity now more than ever. Low-price competition such as Vocus Communications Limited's (ASX: VOC) energy division (Dodo) and other competitors are slowly chipping away at market prices, which narrows profit margins.
If the Federal Reserve starts increasing interest rates, low-growth defensive stocks like AGL could come under selling pressure.
Foolish takeaway
After looking at these two energy heavyweights head-to-head, I think AGL looks like the more solid option of the two. However, patient investors may benefit from waiting until after the Fed's expected December interest increase.
