AGL Energy Limited (ASX: AGL) shares have taken a big dive since 2020, but could this lower valuation mean the future dividend yield is really appealing?
When the share price goes down, the dividend yield goes up, assuming the dividend payment doesn't change in size.
I'll give you an example – if a share had a 5% dividend yield and then the share price drops 10%, it would increase the dividend yield to 5.5%.
However, a heavy fall in a share price can suggest that operating conditions have worsened significantly, which could mean that a lower profit and lower dividend are possible.
In the FY23 half-year result, AGL's underlying net profit after tax (NPAT) dropped 55% to $87 million, while the interim dividend was halved to just 8 cents per share.
However, with management commentary and analyst projections reflecting a positive future, could AGL shares be a future dividend machine?
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Dividend projections
FY23 is not expected to be a very profitable year (after what was seen in HY23) for AGL, and the estimate on Commsec suggests that AGL shares could pay an annual dividend per share of 27 cents. That would be a dividend yield of just 3% – nothing to get excited about considering (safe) term deposits offer an interest rate of above 4%.
But, the company pointed out with its HY23 result that wholesale electricity pricing was "elevated compared to prior periods with AGL expected to benefit as historical contract positions are reset in FY24 and FY25. Additionally, sustained periods of higher wholesale electricity prices are expected to flow through to retail pricing outcomes."
A profit recovery in FY24 and FY25 could enable the business to pay much bigger dividends in the next two financial years.
In the 2024 financial year, the projection on Commsec suggests AGL shares might pay an annual dividend per share of 56 cents, which would be a dividend yield of 6.4%.
There could be an even bigger dividend in FY25 according to the Commsec projection. There could be a dividend per share of 70 cents, which would be a dividend yield of 7.9%. This would be a better dividend yield than what's offered by names like Telstra Group Ltd (ASX: TLS) and Commonwealth Bank of Australia (ASX: CBA) in FY25, according to the Commsec estimates. Though there's more to the consideration of an investment than just the dividend yield of course.
It's very promising for AGL shares that both earnings and the dividend could rise strongly over the next two years.
Forecasts are not guaranteed
Just because experts have pencilled in these potential dividend payments, it doesn't mean they're a confirmed thing. AGL has to generate the profit before it can pay it out.
On top of that, AGL has committed to the decarbonisation of its energy generation efforts, which could cost billions for the business to build all of the transmission assets, solar panels, batteries and so on. It will need to keep at least some of its generated profit to re-invest in power generation to ensure it doesn't take on too much debt to fund the spending.
But, if AGL is able to achieve the projected earnings per share (EPS) of 95.5 cents in FY25, this would mean the AGL share price is valued at just 9 times FY25's estimated earnings.
