AGL Energy Limited (ASX: AGL) shares may not have the best reputation as a prime income-producing investment. Since 2018, the dividend per share (DPS) from this energy giant has crumbled — falling from $1.26 per share to 26 cents per share.
Once upon a time, a 4% dividend yield was considered to be quite good. But now savvy savers can score themselves a 4.5% return through a personal savings account. A higher yield — say around 7% — is more desirable now given the risk premium of shares.
Could AGL shares be one blue-chip that can deliver a sublime 7% yield in the future?
What are analysts expecting for AGL shares?
Let's start with our baseline. At the moment, the $5.25 billion energy retailer is trading on a 3.3% trailing dividend yield, paying 26 cents per share during the past year. As shown below, this is around historical lows for the company.
According to Commsec consensus estimates, analysts forecast the company's yield to expand to 7.2% in FY24. This is based on the current AGL share price and the estimated DPS of 56 cents per share for the year ending June 2024.
If the analysts are right, then AGL could be a passive income machine in FY24. But could their estimates be off the mark? The short answer is yes, they could be — no one knows the future with 100% certainty. But it's more valuable if I provide my thoughts with justification.
Dripping dividends or hunkering down?
If AGL pays 56 cents per share in dividends in FY24, it would increase 115% from its current level. There are three ways that the energy giant could achieve this phenomenal feat:
- Doubling its profits and maintaining its current payout ratio; or
- Maintaining its current profits and doubling its payout ratio; or
- Some combination of the two options above.
In its September 2022 update, AGL guided for between $200 million to $320 million underlying net profit after tax (NPAT) for FY23. At the midpoint, that would be $260 million in underlying NPAT — suggesting a 15.5% increase. If statutory earnings were to grow at the same pace, we'd be looking at approximately $994 million.
Below is the range of scenarios I could see playing out in FY24 — ranging from a 20% fall in earnings (due to investment in its energy transition) to a 20% increase caused by higher wholesale electricity prices.
| Bear case | Base case | Bull case | |
| Earnings growth | -20% | 0% | +20% |
| Statutory NPAT | $795.2 million | $994 million | $1,192.8 million |
| Payout ratio | 20% | 40% | 60% |
| Total dividends | $159.04 million | $397.6 million | $715.68 million |
| DPS | 23.6 cents | 59.1 cents | $1.06 |
| Dividend yield | 3.0% | 7.6% | 13.6% |
Assuming the AGL share price stays at current levels, I'd personally think a dividend yield of around 7% in FY24 is possible. The base case assumes no earnings growth, which is probable in my view as the company plans to invest $20 billion in new generation capacity over the next 13 years.
