AGL Energy Limited (ASX: AGL) shares used to pay large dividends. In 2018 and 2019 the business was paying an annual dividend per share of more than $1.15. That would be a grossed-up dividend yield of close to 20% at the current AGL share price.
But, the dividend has been sinking since then. The FY22 total dividend was 26 cents per share, unfranked. It has dropped a long way from those pre-COVID years. At the current AGL share price, that translates into a dividend yield of 3.2%.
So, should investors look at the energy business for dividend income today?
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Dividends to rebound?
Ultimately, the dividend decisions are up to the board of directors. But, the level of profit that a business makes can have a big impact on the amount of extra cash flow a business has to pay dividends.
In FY23, AGL Energy is expected to generate underlying earnings before interest, tax, depreciation and amortisation (EBITDA) of between $1.25 billion to $1.45 billion, while underlying net profit after tax (NPAT) could be between $200 million to $320 million.
AGL said that those ranges, with an anticipated increase in underlying EBITDA of approximately $100 compared to FY22, reflects the "resilience of AGL's earnings on the back of its largely hedged position for FY23."
In per-share terms, the numbers on Commsec suggest that AGL could generate 40 cents of earnings per share (EPS) in FY23 and 80 cents per share in FY24.
The dividend estimate for FY23 is 29 cents, which would be a yield of 3.6%. FY24 could see an annual dividend per share of 6.7%
FY24 is expected to be stronger because management expects AGL to "benefit from sustained higher wholesale electricity pricing as historical hedge positions roll-off."
Cash flow to be directed to renewables?
AGL now has an ambitious plan to exit coal-fired generation by the end of FY35 and accelerate its transition to an integrated low-carbon energy leader.
The company's annual greenhouse gas emissions are expected to reduce from 40 million tonnes to net zero after the targeted closure.
It's going to progressively decarbonise its asset portfolio with new renewable and firming capacity. The goal is to supply customers with up to 12GW of new energy generation and firming capacity, requiring a total investment of up to $20 billion, before 2036, funded from a combination of assets on AGL's balance sheet, offtakes and partnerships.
This includes an interim target to have up to 5GW of new renewables and firming in place by 2030.
It will be a tricky balance for AGL's leadership to spread the money between dividends and decarbonisation. I'm not sure if a high dividend payout ratio will return any time soon.
AGL share price snapshot
Over the last month, AGL shares have risen by around 10%.
