Dividends may not be what they used to be in a rising interest rate environment but the uplift in AGL Energy Ltd's (ASX: AGL) interim dividend is hard to ignore.
Management announced this morning that it will increase its interim dividend by 32% to 54 cents a share (80% franked) on the back of a 97% surge in statutory earnings per share (EPS) to 94.8 cents.
The underlying EPS growth, a measure that will be scrutinised more by the market as it strips out one-off items and movements in the value of its financial instruments, also grew at a robust clip of 30% to 75.2 cents.
The good result was supported by strong margin growth in its Wholesale Markets division, which more than offset slightly softer margin for its Customer Markets division and the additional resources AGL has put in to the business.
Bill shock has been a pervasive theme in the utilities space as power companies like AGL and Origin Energy Ltd (ASX: ORG) have come under pressure from the federal government and consumer groups to cap escalating power price rises.
This pressure is unlikely to abate, especially now that opposition leader Bill Shorten has declared a war on rising living costs.
Health insurers are in his sights at the moment but any further upward pressure on power costs will certainly put the uncomfortable spotlight back on the utilities sector.
This means cost pressure on AGL's Consumer business is unlikely to abate and rising competition in retail electricity is among some reasons why AGL has underperformed with the stock down over 2%, compared with the 4% rise by the S&P/ASX 200 (Index:^AXJO) (ASX:XJO).
Its performance stands in even starker contrast to Origin Energy, which is up nearly 30% over the same period as Origin benefits from rising oil prices from its gas projects.
But AGL's outlook isn't as gloomy as its share price performance may suggest. Management has reiterated its full year underlying net profit guidance of between $940 million and $1.04 billion and said it is on track to deliver within the middle of this range.
That would be a significant increase over FY17 when the company posted a net profit of $802 million.
AGL's wholesale business is expected to balance out the challenges in the retail division as management expects further margin expansion for FY18 and constructs more power plants (around 900MW extra), which will benefit from any increase in electricity prices.
AGL has a slight dividend skew towards the second half. This means its final dividend should be slightly ahead of the 54 cents it declared today, assuming its business performs to expectations. This means the stock is yielding close to 7% (including 80% franking) based on yesterday's closing stock price of $22.47.
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