AGL Energy shares hit by broker downgrade

AGL Energy Ltd (ASX: AGL) offers a 5.7% dividend yield. Here's why Goldman Sachs has downgraded its view on the energy giant from 'buy' to 'neutral'.

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AGL Energy Limited (ASX: AGL) is considered among one of the best dividend shares by some professional investors; however, it's heavily underperformed the S&P/ASX200 (INDEXASX: XJO) index over the past two years.

The reason AGL is popular with dividend investors is because selling electricity to retail customers provides a steady stream of profits, which translated into $1.17 per share in dividends franked to 80% over the last 12 months. That equals a 5.7% trailing dividend yield based on today's share price of $20.39. 

One investment house that recently downgraded its view on AGL from 'buy' to 'neutral' is Goldman Sachs, who (as at 31 May 2019) placed a 12-month price target on the shares of $22.20. It's forecasting $1.17 per share in dividends though FY20–21, to suggest the forward yield should be around today's level of 5.7%.

Goldman noted that the Coalition's surprise federal election win only went so far in removing uncertainty over federal and state government energy policy and there's still a general risk that energy retailers face tougher regulation on pricing. 

Goldman also flagged AGL's recent approach to internet retailer Vocus Group Ltd (ASX: VOC) as an issue to consider, and noted that Origin Energy Ltd (ASX: ORG) already offers internet services itself. 

Overall, it looks like AGL could remain a solid dividend play for investors, but it remains in a competitive space that is unlikely to deliver huge capital growth upside.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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