Why the AGL share price was only down 6% in March

The AGL Energy Ltd (ASX: AGL) share price was only down 6% in March. Does this mean AGL is a buy for this ASX 200 bear market?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Like most ASX companies, shares of AGL Energy Limited (ASX: AGL) dropped in value last month. Unlike most ASX companies, however, the AGL share price was 'only' down 6% for the month – going from $18.85 to  $17.56.

I say 'only' because most ASX shares did a lot worse last month. For comparison's sake, the broader S&P/ASX 200 Index (ASX: XJO) was down around 27% in the same period.

Why did AGL shares hold up so well in March?

AGL is a utility business at its core – generating and distributing electricity and gas in order to service the energy needs of businesses and households.

These services are highly inelastic – meaning demand for them doesn't normally fluctuate depending on the state of the economy. We all need electricity (and in some cases, gas) to live in our modern world, and power is one of the last things people will let go of if money is tight.

Investors know this, and therefore know AGL's earnings (and dividends) are relatively safe during this time – thus not willing to bid down AGL shares along with the rest of the market, in my opinion.

Are AGL shares a buy right now?

The current AGL share price (at the time of writing) stands at $17.73 – giving it a price-to-earnings ratio of 12.37 and a trailing dividend yield of 6.26% (which comes 80% franked).

This is a relatively low share price and a strong dividend yield to be sure, but I still have some reservations about an investment case for AGL right now.

The coronavirus and related economic shutdowns might well have some unforeseen impacts for AGL. Businesses around the country are in lockdown, with many at reduced capacity or simply in hibernation. This might translate into significantly lower demand for electricity and gas for AGL, which in turn means lower revenues. AGL's assets (such as power plants and transmission wires) are not scalable – meaning costs remain relatively fixed even if demand drops off.

We'll have to wait and see on what scale this eventuates, but I think it's a short-to-medium-term potential problem for the company – and one not entirely reflected in the current share price.

Foolish takeaway

Just two weeks ago, AGL hit a 52-week low of $15.15 – a share price I would consider far more reflective of these uncertainties and thus, far more attractive. If AGL shares were to dip back to these levels, I might reconsider this ASX utility, but I'm not convinced at the current share price.

Motley Fool contributor Sebastian Bowen 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.

More on Defensive Shares

Four businessmen pull martial arts stances as they get into a defensive position.
Defensive Shares

Why I'd buy these ASX defensive shares for reliability in these times

These stocks can offer pleasing stability.

Read more »

The letters ETF on wooden cubes with golden coins on top of the cubes and on the ground
Defensive Shares

Bolster your ASX stock portfolio with these two defensive ETFs

These ETFs can help you sleep at night...

Read more »

Senior man wearing glasses and a leather jacket works on his laptop in a cafe.
Defensive Shares

Overinvested in Woolworths shares? Here are two alternative defensive ASX shares

These businesses offer strong and defensive earnings.

Read more »

Two funeral workers with a laptop surrounded by cofins.
Defensive Shares

Down 24% this year, is this top ASX defensive share a top buy according to Macquarie?

Are investors missing a trick by avoiding this ASX share?

Read more »

A young bank customer wearing a yellow jumper smiles as she checks her bank balance on her phone.
Defensive Shares

Why Telstra shares are an appealing ASX defensive pick

Can investors call on this telco stock for resilient returns?

Read more »

A woman in a hammock on her laptop and drinking a smoothie
Defensive Shares

3 ASX shares to buy for a stress-free life

I think these businesses are attractively defensive.

Read more »

a woman holds her finger to the side of her face and looks upwards as she thinks about something.
Defensive Shares

Portfolio allocation: should I still be buying ASX defensive stocks?

Is this the right time to invest in resilient businesses?

Read more »

Piggy bank at the end of a winding road.
Defensive Shares

Will lower interest rates boost ASX infrastruture stocks?

Let's take a look.

Read more »