AGL Energy Ltd (ASX: AGL) shares look like an underrated option for passive income. I think the ASX dividend stock can provide investors with a pleasing dividend yield and compelling earnings growth, according to projections.
As the above chart shows, AGL has dropped by approximately 40% in the past five years. There are not many S&P/ASX 200 Index (ASX: XJO) shares as large as AGL which have declined as much as that.
However, when a share price falls it means the dividend yield is larger (assuming the payout isn't reduced). While the energy environment is quite different to what it was five years ago, I think the ASX dividend stock may be undervalued at roughly $10 (or below).
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Good dividend yield projected
Dividends are not guaranteed and projections are just professional guesses about what the board of directors are going to decide on the dividend payout.
Nonetheless, I think projections have a good chance of being in the vicinity of the correct number. Net profit generation normally has a major impact on how much of a dividend the leadership team feel comfortable declaring.
The broker UBS is currently projecting that in FY26 the business could pay annual dividend per share of 62 cents per share, representing a year-over-year increase of more than 20% of the projection for FY25 (of 51 cents per share).
The FY26 projection of 62 cents per share translates into a grossed-up dividend yield of 8.75%, including franking credits, assuming the dividends are fully franked that year.
Payout growth projected
It's not the short-term dividend payouts that we should be focused on, but what the dividend could do in the next few years.
If AGL's profit can grow in the coming years, then the dividend can grow too. The ASX dividend stock is currently undergoing a significant investment into large-scale batteries, which could help support earnings in the coming years as having energy storage for times of the day when renewables aren't generating enough power could be very valuable.
Broker UBS is projecting that AGL could grow its net profit could grow from $690 million in FY25 to $971 million in FY29. This could help fund an annual dividend per share of 90 cents per share in FY29. That would be a grossed-up dividend yield of 12.7%, including franking credits.
If those projections do come true, then AGL could be a very underrated ASX dividend stock opportunity, in my view.
