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.
