AGL (ASX:AGL) dividend slashed. Share price down 3% on Thursday

More headwinds for the energy giant as its dividend is now in the spotlight.

| More on:
sad looking petroleum worker standing next to oil drill

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The AGL Energy Limited (ASX: AGL) share price is in the red straight out of the blocks in early trade.

AGL shares are on the move down as the energy giant updated its dividend schedule as part of its FY21 earnings report.

Let’s investigate a little further.

AGL’s dividend

AGL has an extensive dividend history that dates back to 2003. It resumed payments in 2013 after an eight year pause.

AGL’s dividend has been quite growth-agnostic across the term of its distribution schedule.

To illustrate, in the period of 2003 – 2021, AGL grew its dividend at a compound annual growth rate (CAGR) of only 1.94%. Prior to the dividend haircuts in 2020 and 2021, the CAGR was 7.2%.

In a negative note for the AGL share price, AGL declared a full year dividend of 75 cents per share in its FY21 results, which is an approximate 23.5% down-step from the year prior.

In addition, it is both the interim and final dividend of 35 cents and 41 cents respectively, that came in behind the previous year’s payouts.

The down-step occurred on the backdrop of a 10% year on year decrease in revenue, coupled with a 33.5% slide in underlying profits, to $537 million.

Furthermore, this caps of a choppy year for AGL, after it announced plans to demerge into two standalone businesses earlier in the year.

This coincided with the suspension of its special dividend program, where it intended to pay 25% of underlying profits to shareholders over the coming periods.

What does this mean for investors and the AGL share price?

Back on 30 July, we calculated that AGL’s dividend was not enough to overcome the underperformance of its share price on the charts over the last 5 years.

AGL shareholders still realised a loss of 12.4% on their initial investment, if purchasing 1,000 AGL shares on 1 March 2015 and holding until 30 July, when factoring in the total return received in capital gains and dividends. Stripping the dividend out of the equation, the loss mushrooms to 52%.

Therefore, some might argue that AGL’s dividend has provided some downside coverage over the past 5 years.

Furthermore, The Motley Fool encourages investors to consider the notion of a “value trap” when investing in dividend-paying shares, in AGL’s case.

To illustrate, there is an inverse relationship between dividend yield and price. When price goes down, yield goes up, and vice versa.

AGL’s share price has tanked more than 61% over the past 5 years, whereas its dividend has increased over that time.

The apparent dividend yield on AGL shares, therefore, appears to be high, but investors must also consider that this may not be an accurate representation of the investment case, due to the underperforming share price.

Such is the case right now with AGL shares, which now trade on a dividend yield of roughly 9–10% after this morning’s update.

In addition, given that dividends do provide some downside cover to share price depreciation, the down-step is unlikely to please investors.

Therefore, it stands to reason that investors are selling AGL shares in droves on the back of its FY21 dividend and results. To illustrate, AGL shares are now exchanging hands at $7.29 apiece, a 4% dip into the red from the open.

Foolish takeaway

AGL is reining in its dividend payout further, as per its FY21 results. This marks a further downstep in AGL’s distribution schedule, which has faced headwinds over the last two years.

The AGL share price has posted a loss of 57% over the last 12 months and 39% since January 1. This is well behind the S&P/ASX 200 Index (ASX: XJO)’s return of around 25% over the past year.

Finally, investors also need to consider the concept of a value trap in their due diligence for dividend paying shares.

The author Zach Bristow has no positions in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. 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.

More on Share Fallers

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the Electro Optic Systems share price declines today on news the CEO has resigned
Share Fallers

Why Baby Bunting, PointsBet, ResMed, and Suncorp shares are dropping today

These ASX shares are ending the week in the red...

Read more »

a woman looks exhausted and overwhelmed as she slumps forward into her hand while looking at her laptop screen.
Share Fallers

Why AMP, OFX, Rio Tinto, and Telstra shares are dropping

These ASX shares are missing out on the good times today...

Read more »

ASX shares downgrade A young woman with tattoos puts both thumbs down and scrunches her face with the bad news.
Share Fallers

Why A2 Milk, Appen, Boral, and REA shares are dropping today

These ASX shares are having bad days...

Read more »

A couple sit at a desk with tissues and tears in their eyes while they look at a laptop computer screen with a camera set up in the foreground suggesting they are making a video.
Technology Shares

What’s going so wrong for ASX 200 tech shares on Wednesday?

ASX 200 tech shares are leading the market's losses today. What's going on?

Read more »

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the Electro Optic Systems share price declines today on news the CEO has resigned
Share Fallers

Why Block, CBA, Mesoblast, and NAB shares are dropping today

These ASX shares are dropping on Tuesday...

Read more »

A woman with a sad face looks to be receiving bad news on her phone as she holds it in her hands and looks down at it.
Share Fallers

Why Alliance, Aurizon, MVP, and Suncorp shares are dropping today

These ASX shares are out of form on Monday...

Read more »

A person plunges into the pool with only their feet visible above the surface, diving through a heart-shaped inflatable ring.
Share Fallers

Here’s why the Medical Developments share price is sinking 17% on Monday

The share has caught sellers attention today.

Read more »

A woman with a sad face looks to be receiving bad news on her phone as she holds it in her hands and looks down at it.
Share Fallers

Why Amcor, Arafura, Block, and Janus Henderson shares are dropping

These ASX shares are ending the week in the red...

Read more »