AGL shares surged more than 7% yesterday after the 2015-16 annual meeting was told of a surprise near $600 million buyback, dividend lift and surprise earnings upgrade – all of which was aimed at halting a recent slide in the share price.
The news came as the shares had spent the past eight weeks falling from $20.77 in mid August to a recent low of $16.64 on September 14.
The news of the buyback of 5% of the issued shares and the higher dividend payout ratio saw the shares surge 7.3% to a day’s high of $18.97.
They closed up more than 5.8% at $18.70.
The buyback, to cost an estimated $596 million came as analysts had begun to rule out the prospects of a buyback due to likely investment on growth projects.
AGL said it will raise its dividend payout ratio to 75%, from the current range of 60% to 65%, although the company warned the level of franking may decline to 80%.
The company also said it expects its underlying profit in year to June 30, 2017 to be in the range of $720 million to $800 million, compared with the $701 million earned in the 2015-16 financial year. But AGL made a statutory loss of $408 million net loss in 2015-16, mainly due to large impairments related to its exit from gas exploration and production.
The upgrade is despite the warning in the 2015-16 profit announcement of the impact of the warm autumn and winte and a $100 million squeeze to margins on its gas portfolio.
"The benefit of stronger wholesale electricity prices will moderate over the medium term, reflecting the prevailing competitive environment, the timing of price changes and AGL’s hedging profile," it warned last month, while also pointing to wariness over the outcome to wage deals at its Loy Yang and Macquarie power stations.
In the year, the company prepared for the loss of a contract to supply the Portland aluminium smelter in Victoria with electricity from later, booking a $187 million provision.
But yesterday’s AGM was told “AGL expects year-on-year improvements to be weighted towards the second half of FY17. This guidance statement reflects the strength of AGL’s business despite previously disclosed challenges including unseasonably mild weather in July/August and the anticipated reduction in gas portfolio EBIT of at least $100 million compared with FY16.”
Despite the recent share price softness, analysts have been wary about recommending clients invest in the company’s shares due to concerns of a shift of market focus away from high yielding shares, coupled with the prospect of competition for investor funds with the pending sharemarket float of Alinta Energy.
They also warned the prospects of a share buyback may have faded as the company continues to invest in growth projects, fears that proved to be unfounded given the announcement yesterday.
AGL Chairman Jerry Maycock said the initiatives (the buyback and higher dividend payout ratio) "reflect the strength of AGL’s liquidity position and the highly cash-generative nature of our portfolio. This liquidity provides a strategic advantage as it enables us to invest in growth and fund improvements to our core business while retaining financial flexibility to respond to emerging opportunities as energy markets evolve.”
"AGL will continue to prioritise and explore such investment opportunities, and to maintain a strong balance sheet within the parameters of our Baa2 credit rating. Within this context, our new dividend policy and our decision to deploy excess cash in the shorter-term via a share buy-back, reflect the Board’s confidence in AGL’s cash position."
And AGL CEO, Andy Vesey, said: ‘AGL is investing in innovations that will benefit our customers and keep us at the forefront of the evolution of our industry, such as our $300 million Digital Transformation Program. In addition, we are evaluating new growth opportunities to exploit our core energy markets capabilities, on which we expect to provide an update to investors in November of this year.’
"The introduction of a target payout ratio of approximately 75 percent of Underlying Profit replaces AGL’s current ‘progressive’ dividend policy. In each of the past five years, this has resulted in a payout ratio of approximately 60 to 65 percent,” he said in yesterday’s statement.
At the AGM AGL Energy shareholders delivered a first “strike” on executive pay with nearly a third of shareholder votes at the meeting went against the company’s remuneration report, which included the use of non-financial targets and underlying earnings to calculate chief executive Andy Vesey’s $6.94 million pay packet.
AGL chairman Jerry Maycock said the vote as “a disappointing result”, and said AGL’s pay structures were appropriate for management’s performance. However, he promised to review future disclosures in relation to executive remuneration and short-term incentives.
Shareholder votes on the remuneration report are non-binding, but two “ trikes" – two consecutive years where more than 25% of votes go against the report – can trigger a spill of a company’s board.
