Is AGL Energy Ltd (ASX: AGL) an opportunity today, with a share price of $24.66, and 3.7% dividend yield?
The company has been a market-beater in recent years, although returns prior to that have been mediocre:
I think I first wrote about AGL three years ago, when it was priced at $12-something and raised a billion dollars by selling new shares at $11 per share to fund its MacGen coal asset acquisition. At the time I thought the company was a clear bargain, although to my chagrin I a) did not purchase any shares and b) have persistently and incorrectly thought the company was overvalued every year since. I tell you this to give you some context, because I'm about to suggest the time is coming where AGL could be a sell.
The reason I've been wrong is simply that the company has earned far more than I thought it capable of, given mediocre customer numbers and a competitive environment (like many utilities). Rising energy prices have propelled earnings higher, and AGL is now being priced like a fast-grower rather than a stodgy old utility. Mostly this is due to rising electricity prices, although to be fair the company also has several genuine growth opportunities, including renewables.
However, there's a downside. Total debt is increasing, up $420 million to $3.2 billion. It'll probably go higher as AGL invests in growth. Second, the company has been buying back shares at ~$20 apiece just three years after issuing millions at $11 to finance an acquisition. Third, the electricity market is probably close to the point at which new competition enters and/or the government intervenes.
Thanks to changes in the supply-demand relationship, AGL is earning cracking profits that show no signs of abating. New electricity can't be conjured from thin air (there is a lead time to construct supply) and the impact of regulation is an open question. If you're a shareholder, you don't want to sell AGL too soon and miss your opportunity to really cash in.
Still, over the next 2-3 years, there is potential for big changes to the national electricity market. Electricity prices are a political hot potato, and cannot rise too high or many businesses become unviable. If I saw AGL's share price around $36 or above – i.e., 24x next year's forecast profits of ~$1 billion – I would strongly consider selling. For now I think that shareholders should enjoy the ride.
