Australian Gas System - Essay Example

Dividends during that time have grown from 52 cents per share to 63 cents per share (93 cents per share in 2005 which includes a special 30-cent dividend). That is approximately 5% dividend growth per year.

Earnings per share (excluding extraordinary items) during the last three years has grown from 73 cents per share in 2003 to 79 in 2004 and 84 cents per share in 2005 (the last year full figures are available), which is an average growth rate of just over 7% per year.

Underlying profit (excluding significant items) grew from $351 million to $386 million just over 6% growth for the year.  EBIT remained steady at approximately 13.6% of funds employed. Total liabilities dropped from $3.4 billion to $2.6 billion a 22% drop. The debt to equity ratio dropped significantly dropping from over 40% in 2004 to approximately 27% in 2005.

The price-to-earnings ratio during the last three years has remained relatively stable as well. In February 2003 the stock was trading at about 10.00 per share and had earnings of 73 cents that gave it a P/E of approximately 14. In February 2004 the stock was trading at just over 11.00 per share and had earnings of 79 which kept the P/E very close to 14 in February 2005 the stock was trading at approximately 13.25 per share and had earnings of 84 cents. This caused the P/E to jump slightly to approximately 16 which was still well within the average P/E of other gas and electric companies. 

There is a myriad of risk factors for this company, including (but not limited to): rates being set by the regulatory board that is not in line with company expectations, a vote by shareholders that halts the planned divestiture of AGL energy, and AGL infrastructure into two separate entities, the ongoing environmental investigations, and standards that need to be met and of course a more consistent weather pattern that lowers the demand for electricity or natural gas.

The rates that are currently being considered are in line with industry standards and though several rate revisions are being considered by the regulatory commission the company feels that the recent trend has been for the governing board to take a light approach, not a heavy-handed approach to rate increases. This bodes well for the company.

The divestiture of AGL energy into a separate entity is viewed by most experts to be a good decision and profitable for the shareholders. Recent surveys show that the majority of shareholders are planning to vote for the divestiture and subsequent merger at the shareholder's meeting in October 2006.

The company is committed to a clean environment and recently began to draw up plans for the cleanup and disposal of former electric generating sites and continues to work diligently with environmental groups and agencies to ensure a cleaner environment. Even though 2005 showed a warmer weather pattern than 2004, lowering demand for services, sales, and revenues still grew during the year.

This growth was due to AGL’s aggressive marketing of the dual energy approach (gas and fuel). Each division added thousands of new customers, which subsequently added to the bottom line and profitability of the company.

The recommendation is to buy and hold the stock of this company while keeping a sharp eye on two upcoming events. The first event is the merger vote happening at the shareholder meeting in Oct. If this were to turn out negative, the stock price would more than likely fall, perhaps substantially. The second event would be any negative news emerging from the regulatory boards. This could also affect the share prices adversely. If given the opportunity, and with the appropriate time frame, an automatic reinvestment of dividends might be the best way to go with this particular stock.