AGL Resources: This Is A Cash Machine

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Sep 03, 2014

In this article, let's take a look at AGL Resources Inc. (GAS, Financial), a $6.37 billion market cap company, which is an energy services holding company with operations in natural gas distribution, retail operations, wholesale services, midstream operations and cargo shipping.

Acquisitions

The company´s peers have invested heavily in non-regulated businesses, such as natural gas production. Instead, AGL had another strategy and expanded in its regulated utility operations. Further, the firm has planned to grow on acquisitions. In December 2011, AGL purchased Nicor for $1.5 billion in stock and $980 million in cash. The deal made AGL Resources expanded its scope, scale and geographic reach. AGL's purchase doubled the size of the retail services business and strengthens the competitive position. Further, it led to one of the most appealing dividend company.

Dividend yield

The company has good cash that allows it to reward current shareholders through dividends, which increased at a compound annual growth rate (CAGR) of 2.3% in the last five years. In early February, the company announced an increase in the quarterly dividend from 47 cents a share to 49 cents a share.

Dividend-payment history affirms its commitment to maximize shareholder wealth. Dividends have been paid since 1939 and the company has raised the payout for 12 consecutive years. The annualized yield is 3.6%.

Revenues, margins and profitability

Looking at profitability, revenue growth by 10.53% led earnings per share increased in the most recent quarter compared to the samequarter a year ago ($0.53 vs $0.42). During the past fiscal year, the company increased its bottom line by earning $2.65 versus $2.31 in the prior year. This year, Wall Street expects animprovement in earnings ($4.49 versus $2.65).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
GAS AGL Resources 8.62
NFG National Fuel Gas Co 11.85
UGI UGI Corp. 11.16
ATO AtmosEnergyCorp 9.42
 Industry Median 8.19

The company has a current ROE of 8.62% which is higher than the industry median, but below the ones exhibit by National Fuel Gas Co. (NFG, Financial), UGI Corp. (UGI, Financial) and Atmos Energy Corp. (ATO, Financial). It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.

03May20171402331493838153.png

Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 13.6x, trading at a discount compared to an average of 20.0x for the industry. To use another metric, its price-to-book ratio of 1.6x indicates a slight discount versus the industry average of 1.56x while the price-to-sales ratio of 1.16x is belowthe industry average of 1.54x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10.000 five years ago, today you could have $18.715, which represents a 13.4% compound annual growth rate (CAGR).

03May20171402341493838154.png

Final comment

As outlined in the article, AGL has focused on acquisitions and it is possible that economies of scale will be created. Moreover, the firm has a growing stream of cash to support the attractive dividend yield. Further, the PE relative valuation makes me feel bullish on this stock.

Hedge fund guru Jim Simons (Trades, Portfolio) added this stock to his portfolio in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned