Are AGL shares going to become a dividend machine?

The last few years have been painful for AGL shareholders. Are things about to turn around?

| More on:
Woman holding $50 notes and smiling.

Image source: Getty Images

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

Key points

  • AGL shares could pay a dividend yield of 7.9% in FY25
  • Higher electricity prices are expected to boost AGL’s profit over the next two years
  • The company is also expecting to invest a lot in renewable energy over the next few years

AGL Energy Limited (ASX: AGL) shares have taken a big dive since 2020, but could this lower valuation mean the future dividend yield is really appealing?

When the share price goes down, the dividend yield goes up, assuming the dividend payment doesn't change in size.

I'll give you an example – if a share had a 5% dividend yield and then the share price drops 10%, it would increase the dividend yield to 5.5%.

However, a heavy fall in a share price can suggest that operating conditions have worsened significantly, which could mean that a lower profit and lower dividend are possible.

In the FY23 half-year result, AGL's underlying net profit after tax (NPAT) dropped 55% to $87 million, while the interim dividend was halved to just 8 cents per share.

However, with management commentary and analyst projections reflecting a positive future, could AGL shares be a future dividend machine?

Dividend projections

FY23 is not expected to be a very profitable year (after what was seen in HY23) for AGL, and the estimate on Commsec suggests that AGL shares could pay an annual dividend per share of 27 cents. That would be a dividend yield of just 3% – nothing to get excited about considering (safe) term deposits offer an interest rate of above 4%.

But, the company pointed out with its HY23 result that wholesale electricity pricing was "elevated compared to prior periods with AGL expected to benefit as historical contract positions are reset in FY24 and FY25. Additionally, sustained periods of higher wholesale electricity prices are expected to flow through to retail pricing outcomes."

A profit recovery in FY24 and FY25 could enable the business to pay much bigger dividends in the next two financial years.

In the 2024 financial year, the projection on Commsec suggests AGL shares might pay an annual dividend per share of 56 cents, which would be a dividend yield of 6.4%.

There could be an even bigger dividend in FY25 according to the Commsec projection. There could be a dividend per share of 70 cents, which would be a dividend yield of 7.9%. This would be a better dividend yield than what's offered by names like Telstra Group Ltd (ASX: TLS) and Commonwealth Bank of Australia (ASX: CBA) in FY25, according to the Commsec estimates. Though there's more to the consideration of an investment than just the dividend yield of course.

It's very promising for AGL shares that both earnings and the dividend could rise strongly over the next two years.

Forecasts are not guaranteed

Just because experts have pencilled in these potential dividend payments, it doesn't mean they're a confirmed thing. AGL has to generate the profit before it can pay it out.

On top of that, AGL has committed to the decarbonisation of its energy generation efforts, which could cost billions for the business to build all of the transmission assets, solar panels, batteries and so on. It will need to keep at least some of its generated profit to re-invest in power generation to ensure it doesn't take on too much debt to fund the spending.

But, if AGL is able to achieve the projected earnings per share (EPS) of 95.5 cents in FY25, this would mean the AGL share price is valued at just 9 times FY25's estimated earnings.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Dividend Investing

Happy man holding Australian dollar notes, representing dividends.
Dividend Investing

Analysts say these ASX dividend stocks are top buys for income investors

Let's see which stocks are being tipped as buys.

Read more »

Man holding Australian dollar notes, symbolising dividends.
Dividend Investing

Buy these ASX dividend shares for 4% to 11% yields

Analysts expect these buy-rated shares to offer great dividend yields.

Read more »

fingers walking up piles of coins towards bag of cash signifying asx dividend shares
Dividend Investing

I think these 2 ASX dividend stocks are buys for income in June

These businesses can provide solid income for investors.

Read more »

A businesswoman weighs up the stack of cash she receives, with the pile in one hand significantly more than the other hand.
Dividend Investing

Why I think this is the best ASX dividend share to own

This business has so many positive attributes…

Read more »

a mature aged couple dance together in their kitchen while they are preparing food in a joyful scene as the Breville share price rises on the back of a 25% profit surge
Dividend Investing

The best ASX income shares for retirees in 2025

Let's see what makes these shares top picks for retirees.

Read more »

A retiree relaxing in the pool and giving a thumbs up.
Dividend Investing

3 under-the-radar ASX All Ords shares that could fund your early retirement

I think all three of these relatively unknown stocks are strong choices for retirement.

Read more »

Falling yellow arrow with descending wooden bars with the percentage sign written on them.
Dividend Investing

Buy these ASX dividend shares to beat falling interest rates

Let's see which dividend shares analysts are tipping as buys this month.

Read more »

A senior couple discusses a share trade they are making on a laptop computer
Dividend Investing

1 ASX dividend stock down 54% I'd buy right now

This business could build good returns for investors.

Read more »