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The ASX defensive stock rounding out my “2019-proof” portfolio

I’ve previously written (here and here) about my expectations for the Australian share market in 2019 and it is my view that we are in an increasingly volatile, late-cycle share market.

In my third and final installment, I’ve chosen a personal favourite stock from the historically non-cyclical Energy sector to round out my “2019-proof” portfolio.

AGL Energy: The Defensive Stock

Investors in AGL Energy (ASX: AGL) have endured a difficult 12 months, with the share price finishing 2018 down 16.00% at $20.483 before arresting the slump in early January to close out the week at $21.66 per share, or 6.70% higher for the year. And I think this is just the beginning for the energy generator and retailer, or “gentailer”.

Whilst highly-cyclical industries such as real estate have performed well in recent years as the bullish economic times have kept on rolling, all good things must come to an end.

I believe that 2019 could be the changing of the guard for the ASX200 and an allocation to AGL adds a defensive element to the portfolio through exposure to a necessary consumption commodity, being electricity.

As a generator, retailer and distributor of energy, AGL is the largest and most dominant player in the National Energy Market (NEM), forming part of the “Big Three” alongside Origin Energy Ltd (ASX: ORG) and the unlisted EnergyAustralia.

Having complete coverage across the NEM allows the likes of AGL to adapt to changing market conditions whilst capitalising on persistent support for domestic energy prices. 2018 was dominated by headlines of power issues in the Australian states and territories, particularly South Australia, prompting regulators to try and bring down “unaffordable” electricity prices.

However, despite their best efforts, my calculations from Australian Energy Market Operator (AEMO) data estimate that the average electricity price remains elevated at $92.15/MWh compared to just $30.35/MWh in 2015, which should serve to support AGL’s profitability in the near-term.

Looking further ahead, the company appointed Brett Redman as CEO in August 2018 and he has reaffirmed the group’s commitment to renewable energy and the retirement of its Liddell Power Station in 2022. With a Labor election victory appearing likely in the May 2018 Federal Election, I would expect to see further investment in renewables, a concerted effort to reduce coal-fired generation and greater support for AGL’s solar, wind and hydro projects from a Labor government.

In my view, with long-term tailwinds for the company, its current market price of $21.66 at Friday’s close appears cheap to me. AGL endured a difficult run in 2018 but with an 80% franked 5.49% dividend yield, it fills the final slot in my 2019-proof portfolio perfectly.

I briefly considered adding a high-yield stock such as Alumina Limited (ASX: AWC) or National Australia Bank Ltd.  (ASX: NAB) which are offering a juicy 10.20% and 8.05%, respectively, as my third and final stock. However, the capital upside unlocked by allocations to Syrah Resources Ltd  (ASX: SYR) and the strong 6.38% yield I expect Wesfarmers Ltd  (ASX: WES) to generate has allowed me to position more defensively with AGL.

Overall, I believe this three-stock portfolio manages to balance growth, commodities exposure and mitigate broad macroeconomic risks I expect to see this year to provide a “2019-proof” portfolio.

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Motley Fool contributor Lachlan Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.

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