AGL Energy Limited (ASX: AGL) has reported its half-year report to 31 December 2018, is it a buy?
AGL traces its origins back to 1837 is one of Australia’s largest power retailers, the largest electricity power generator and the largest ASX-listed investor in renewable energy. The power company has 3.6 million customer accounts. The company is committed to exiting coal generation by 2050.
AGL Half Year Result
AGL reported that statutory profit after tax fell by 53% to $290 million and statutory earnings per share (EPS) also dropped by 53% to 44.2 cents.
The energy business said this reflected a negative movement in the fair value of financial instruments. It’s a non-cash item but must be recognised in the accounts. The movement reflected higher forward prices and is consistent with how AGL hedges its electricity generation position with forward contracts.
Net cash from operating activities fell by 15% to $678 million.
However, ‘underlying’ profit after tax grew by 10% to $537 million and underlying EPS also increased by 10% to 81.9 cents. This profit measure excludes the movement of values in financial instruments and significant items. AGL benefited from higher electricity prices.
AGL did point to the impact of customer affordability programs and higher costs to support future plant availability to AGL’s coal-fired power stations as reasons why the profit wasn’t higher.
Dividend
The company decided to increase the interim dividend by 2% to 55 cents, which will be 80% franked.
AGL said its dividend policy remains to target a payout ratio of 75% of underlying profit after tax.
AGL Management Comments
AGL CEO Brett Redman said: “As the market is aware, increased input costs for coal, supply constraints in the gas market, weather impacts and ongoing energy policy uncertainty continue to place upward pressure on electricity prices.”
Mr Redman also announced that the company would be investing $25 million to upgrade the AGL Loy Yang coal-fired power station, which will deliver increased, more efficient output without raising carbon emissions.
AGL also announced it has secured an option over a 250 MW pumped hydro energy storage project at Bells Mountain.
FY19 Guidance
Mr Redman confirmed that AGL Energy is tracking towards the mid-point of guidance for underlying profit between $970 million to $1.07 billion.
Are AGL shares a buy?
Bell Potter had estimated that AGL Energy’s profit would come in at $567 million, so today’s announcement appears to have underperformed those expectations.
I’m not sure what AGL’s long term profit growth with the increasing number of solar panels being installed in homes. However, renewable energy is making energy generation cheaper, so that should be net benefit. I do prefer AGL compared to Origin Energy Ltd (ASX: ORG).
I think the best reason to buy AGL shares is its steadily-growing dividend. It offers a potential partially franked dividend yield of 5.3%, which is quite attractive.
The problem is that there is enormous political pressure for prices to come down, so it might be better to consider one of the proven ASX shares in the free report below, instead of AGL.
3 ASX shares that could be more reliable than AGL
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