The AGL Energy Limited (ASX: AGL) share price is in the red straight out of the blocks in early trade.
Let’s investigate a little further.
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.
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.