The AGL Energy Ltd (ASX: AGL) share price continues to set record lows as we head into the remainder of 2021.
AGL shares are now exchanging hands at $7.52, a 2.4% dip into the red from the market open.
Today’s dip extends the previous 1 month’s loss of ~16% and the previous 12 months’ loss of 55%.
Let’s take a look at some of the headwinds AGL shares have faced lately.
Planned demerger
AGL started the month on the back foot after provided an update on its planned demerger back on 30 June.
AGL explained that it will create two separate listings from the demerger: AGL will become Accel Energy. It will then form a new company, AGL Australia.
The plan will complete the work to spin off its coal-fired power plants to Accel, which will retain these under the new structure.
AGL Australia will then focus its priorities as the largest power retailer in Australia.
Considering AGL is labelled as Australia’s top emitter of “scope 1 greenhouse gases”, it is pursuing a strategy to compete with the emergence of renewables.
AGL chair Peter Botten was quoted saying in the announcement:
The impact of recent challenging market conditions on our financial performance emphasises that AGL Energy is not at an inflection point as the transition of the energy sector accelerates.
Shareholders will go to vote on the proposal later this year, with the company aiming to complete the demerger by Q4 if successful.
Guidance downgrade
AGL also withdrew its FY22 guidance amid the ongoing uncertainties with the planned demerger.
Regarding the coming financial year, it estimates a “material step-down” in earnings on a backdrop of “lower wholesale electricity prices”.
It states these prices have been low for the last 2 years and are only now to be realised by the company.
Suspension of dividend
Regarding its dividend, AGL will be terminating its special dividend program to “preserve ~$400 to $500 million in cash within AGL prior to execution of the demerger”.
Analysts are not viewing AGL’s dividend prospects highly, with an overall negative sentiment.
The company has paid dividends per share of 92 cents over the last 12 months, implying a current yield of 12.2%.
This has crept up from 11.7% on 26 July when AGL shares had set a new record low at $7.87.
However, there is an inverse relationship between share price and dividend yield. If price goes down, yield goes up, and vice-versa.
The Motley Fool encourages investors to consider the concept of a “value trap”. This is where a high and increasing dividend yield is masking a depreciating share price.
Investors who are chasing yield buy on the increasing dividend yield for a particular company, believing they have nabbed a bargain.
However, the prospect of total return is then hindered by poor performance from the underlying share price.
Such is the case with AGL shares given the rapid decline in share price over the previous 12 months, which has propped up the dividend yield.
Since it announced it would slash its dividend, AGL shares have sunk firmly into the red by 17%.
Foolish takeaway
The AGL share price has underperformed the S&P/ASX 200 Index (ASX: XJO) by a considerable amount this month. The broad index has posted a return of 1.16% over the last month versus AGL’s loss of ~17%.
It stands to reason the demerger proposal has been a major catalyst for AGL’s share price depreciation over the past month.
This, coupled with the dividend, has seen AGL shareholders continue to realise record low share prices, which offset the attractiveness of the dividend yield.
The demerger narrative certainly isn’t over for AGL, with shareholders yet to fully vote on a resolution on the matter.
