AGL (ASX:AGL) takes a knife to dividends in its first-half earnings

A dent in dividends hasn't stopped the AGL share price from rising today…

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Key points

  • The AGL share price is moving higher following the release of the company's first-half results
  • A slump in underlying earnings has resulted in the company cutting the interim dividend by 60%
  • The energy giant has laid out emission targets and dividend policies post Accel Energy demerger 

The AGL Energy Limited (ASX: AGL) share price is centre stage on Thursday after the company handed down its FY22 first-half results.

In morning trade, shares in the Australian energy giant are trading 2.7% higher at $7.73 apiece.

AGL share price gets a bump despite earnings slump

The highlights of the report are:

  • Revenue up 6% from prior corresponding period to $5,713 million
  • Underlying earnings before interest, tax, depreciation, and amortisation (EBITDA) down 21% to $723 million
  • Total customer numbers relatively flat at 4.205 million
  • Net cash from operating activities increased 9% to $661 million
  • Underlying net profit after tax down 41% to $194 million
  • Statutory net profit after tax swung from a loss to a $555 million profit
  • Interim dividend slashed from 41 cents to 16 cents per share

What else happened during the first half?

For the six months ended 31 December 2021, AGL pushed through yet another challenging period. So, why are investors bidding up the AGL share price on Thursday? Here's a closer look at the details.

In general, the disappointing half from an underlying perspective was driven by a decrease in contracted electricity prices. In addition, lower electricity demand — due to further increases in rooftop solar — and thinner margins on gas supply were all contributing factors.

Furthermore, this time around AGL lacked the one-off insurance proceeds from the damage at Loy Yang. At the same time, the company was selling off its hedging mechanisms at higher wholesale electricity prices.

Fortunately, the electricity gentailer partly offset the woeful result with $57 million in operational cost savings. This puts the company on track to achieve its $150 million in operating cost savings by the end of this financial year.

Other notable items potentially helping the AGL share price today include information on the company's climate commitments and the financial structure of its demerger.

Firstly, AGL Australia is planning to be a net-zero operator by 2040. The company is aiming to reduce its emissions by 50% by 2030. Meanwhile, AGL offshoot Accel Energy has a bit more leeway — targeting a 55% to 60% reduction in annual emissions some time between FY35 and FY46.

What did management say?

AGL Energy managing director and CEO, Graeme Hunt, stated:

Our 1H22 result reflects a solid first-half performance by the business with continued resilience of operations and portfolio against the backdrop of another period of disruption from the pandemic.

As anticipated, our 1H22 result reflects a reduction in earnings largely driven by the non-recurrence of $105 million in insurance proceeds received in 1H21. After adjusting for the non-recurrence of the insurance proceeds in 1H21, Underlying Profit after Tax was down 23 percent, reflecting the impact of lower wholesale prices over the past two years as we have progressively re-contracted our hedging positions from previously higher prices.

Regarding the demerger of AGL Australia and Accel Energy, Hunt said:

We are well-progressed with our proposed demerger with completion on track for 30 June 2022. The proposed demerger will create a strong future for both parts of our business and through this enable a responsible and orderly transition towards a decarbonised energy future.

What's next?

Amid the latest half-year figures, AGL is now able to provide more concise guidance for FY22 earnings. The company now anticipates underlying EBITDA to be between $1,275 million and $1,400 million. This is compared to the prior guidance of $1,200 million to $1,400 million.

Likewise, the underlying net profit after tax has been revised to $260 million to $340 million. This represents a $40 million increase to the bottom of the previous range. This might explain some of the optimism for the AGL share price today.

The proposed demerger is slated to be implemented by 30 June 2022, assuming regulatory and/or court approvals. Guidance for the costs of the demerger is between $220 million and $260 million.

Once commencing their separate corporate lives, the two companies will hold different dividend policies. According to today's release, AGL Australia will pay out 60% to 75% of its underlying NPAT. Meanwhile, Accel will provide 80% to 100% of its free cash flows after servicing financing costs in the form of a dividend.

AGL share price snapshot

The AGL share price has been a solid performer so far this year. Unlike many other companies in the S&P/ASX 200 Index (ASX: XJO), the energy company avoided January selling pressures. As a result, the company's shares are up 19.3% since the beginning of 2022.

However, on a longer timeline, the AGL share price remains in the negative. For example, if we look at the past 12 months, shares in AGL are 32% in the red.

Motley Fool contributor Mitchell Lawler has no position 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.

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