AGL eyes earnings lift, flags share buyback and dividend boost

AGL has tipped a steady advance in earnings, as it unveils a $600m share buyback and flags a lift in dividends.

AGL CEO and managing director Andy Vesey. (Pic: Roy VanDerVegt)

AGL has tipped a steady advance in earnings for the full year amid a push to sharply boost shareholder returns through a $596 million share buyback and a lift in dividends.

The wide-ranging update saw its shares shoot up 6.9 per cent to $18.90 by 10.20am (AEST).

The action coincides with news of the surprise appointment of Oil Search chief executive Peter Botten to its board ahead of its annual general meeting today.

AGL (AGL) said today it expects fiscal 2017 underlying profit to land within a wide range of $720 million to $800m.

Such a result would produce a lift of at least 2.7 per cent on the $701m underlying earnings result declared for FY2016 last month, with the upper end of the range representing growth of 14.1 per cent.

The company said the main contributors to the profit growth would be expanding wholesale electricity margins, benefits from its “customer value strategy” tied to a $300m digital investment and the achievement of transformation targets.

“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 $100m compared with FY16,” the company said.

Ahead of today’s update, AGL had merely informed investors it expected some “growth” in underlying earnings for FY2017.

The group also expressed confidence in its cash generation as it moved away from a “progressive” dividend policy that recently saw it dish out around 60 to 65 per cent of its underlying profit to shareholders in the form of dividends.

This has now been replaced with a target payout ratio of 75 per cent, with the shift to be seen from its first dividend of calendar 2017.

AGL will also pursue a buyback of up to 5 per cent of its stock, or 33,735,619 shares, worth $596m at current prices.

“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,” AGL chairman Jerry Maycock said.

“Within this context, our new dividend policy and our decision to deploy excess cash in the shorter-term via a share buyback, reflect the board’s confidence in AGL’s cash position.”

The utility also informed investors that tense negotiations on new enterprise bargaining agreements at AGL Loy Yang and AGL Macquarie were continuing amid talk a failure to resolve the IR issues could result in power cuts.