S&P/ASX 200 Index (ASX: XJO) dividend stock AGL Energy Ltd (ASX: AGL) looks well-placed to deliver investors some outsized gains in the year ahead. Not mention some welcome passive income.
That's according to the team at Macquarie Group Ltd (ASX: MQG).
AGL shares closed up 1.2% on Friday, trading for $8.47 apiece.
While that beat the essentially flat performance of the benchmark index on Friday, longer-term, AGL shares remain down 28.0% over 12 months.
As for that passive income, the energy company paid out 48 cents a share in fully franked dividends over the full year. At Friday's closing price, that sees AGL shares trading on a fully franked dividend yield of 5.7%.
Looking to the year ahead, Macquarie expects the ASX 200 dividend stock to recoup most of the losses it suffered over the past year. And the broker believes AGL is well-placed to keep paying out market-beating dividends.
Here's why.
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Why Macquarie is bullish on the ASX 200 dividend stock
In a research report released on Wednesday, Macquarie pointed out that AGL shares are trading at a significantly cheaper valuation than their historical average.
According to the broker:
AGL's valuation is increasingly attractive as the PE [price to earnings ratio] de-rated over the FY25 result. Forward PE at 9.3x is 2 SD [standard deviations] below the long-term average and at ~55% discount to industrials. Yield is ~6% fully franked and sustainable.
Macquarie also noted that the quality of AGL's earnings is improving "with batteries replacing older gas and coal contracts over the next two years, thus op c/flow [operating cash flow] grows to meet near-term capex [capital expenditure] surge".
As for that capex demand for the ASX 200 dividend stock, Macquarie added that with wind farm (WF) and solar farm (SF) investment through power purchase agreements (PPAs), "capex demand is relatively moderate".
And the broker expects AGL shares will catch some tailwinds from rising power prices.
"The latent value in the legacy generation assets is significant. The core opportunity is that underlying power prices need to be structurally higher to accelerate the energy transition," the broker said.
Commenting on the energy transition, Macquarie said:
Near-term, the household battery rollout, which is annualising ~4-5GWh, provides the opportunity to step change the VPP [virtual power plant], providing a new source of cost savings without hurting individual customer profitability.
Connecting the dots, the broker maintained its outperform rating on AGL shares, noting that, "Management have consistently delivered at mid or upper end of guidance and have a path for cashflow growth. AGL is at a PE of around 5.3x."
Macquarie raised its price target for the ASX 200 dividend stock to $11.00 (from $10.91), adding that it sees "an upside bias as higher power prices structurally increase".
That represents a potential upside of 30.0% from Friday's closing price.
