Is AGL (ASX:AGL) really offering a 7% dividend yield today?

Is AGL Energy Limited’s (ASX: AGL) dividend yield of 7.3% legitimate? Here’s the breakdown of this seemingly massive yield.

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Looking at the AGL Energy Limited (ASX: AGL) share price today, a few things stand out. First up, the share price itself. AGL shares are trading at $13.46 at the time of writing. That gives this company a market capitalisation of $8.4 billion and a price-to-earnings (P/E) ratio of 8.51.

That is a very low share price for AGL, historically speaking. The last time AGL shares were this low was back in early 2015. On these prices, AGL shares have lost more than 50% of their value since they hit $27.61 per share in 2017.

And here’s another sobering statistic: you could have bought AGL shares for the same price as you can today, way back in 2006.

But secondly, AGL’s trailing dividend appears to be offering a whopping 7.27% yield on today’s prices. That’s more than triple the trailing yield of 2.39% that market-wide S&P/ASX 200 Index (ASX: XJO) fund, iShares Core S&P/ASX 200 ETF (ASX: IOZ), is offering. And it’s over 13 times more yield than a Commonwealth Bank of Australia (ASX: CBA) term deposit is offering right now at 0.55% per annum.

So is this yield too good to be true?

The AGL monster dividend

Well, let’s look at AGL’s latest shareholder payouts. Unlike some ASX dividend shares, AGL has paid two dividends in 2020. The first was an interim dividend of 47 cents per share (80% franked) that was paid in March. The second was a final dividend of 51 cents per share (also 80% franked), paid out in September. That’s 98 cents per share in dividends for 2020, giving AGL shares a trailing yield of 7.27%. So it does check out! Including the value of those franking credits, this trailing yield rises to 9.76% grossed-up.

It is worth noting that AGL has given some rare guidance into its plans for this dividend over the next few years. The company currently has a ‘payout ratio’ policy, which instructs that 75% of its profits should be paid out as dividends every year. Back in August, AGL told investors that its profits for the 2020 financial year were $816 million, which was down 22% from the prior year. But it also told the market it expects this profit to dip further in FY2021 to just $560 million. That’s not enough to keep 2020’s dividend levels steady next year under this ‘75% payout ratio’ rule.

However, AGL also told investors it would be bringing in a new rule for dividend payments for FY2021 and FY2022. This involves paying an additional 25% of profits as ‘special dividends’ on top of the normal 75%. In effect, this means AGL has committed to paying out 100% of its profits as dividends for the next two years. However, dividends won’t be coming with any franking credits at all over this period. This is being done so that AGL can “utilise historic tax losses”.

So yes, it would appear that AGL is really offering a dividend yield of nearly 7.3% today, if the company’s guidance is anything to go by.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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