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This Natural Gas Could Be in Your Value or Growth Portfolio

March 28, 2014 | About:
Victor Selva

Victor Selva

9 followers

AGL Resources Inc. (GAS) is an Atlanta-based energy services holding company with operations in natural gas distribution, retail operations, wholesale services, midstream operations and cargo shipping. Let's take a look at this company and try to explain to investors the reasons this is an apparently appealing investment.

A Merged Entity

The company has focused on acquisitions that could create greater economies of scale. In December 2011, GAS purchased Nicor for $1.5 billion in stock and $980 million in cash, which has significantly expanded AGL Resources scope, scale and geographic reach, doubling the number of AGL's utility customers. "This acquisition almost doubles the size of our retail services business and strengthens our competitive position in this space," said John W. Somerhalder II, chairman, president and chief executive officer of AGL Resources.

Main Segments

Its main reporting segments are Distribution Operations (84% of 2012 segment EBIT), Retail Energy Operations (18%), Midstream Operations (2%), Wholesale Services (<-1%), Cargo Shipping (1%) and other (-5%). In recent years, other segments like the retail energy-related products and services, natural gas wholesale marketing and other gas supply management services have grown in good shape in the past times and are expected to continue in the next years.

Dividend Policy

The company has good cash that allows it to reward current shareholders through dividends. The dividend was 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 4.2%.

Analyst Recommendation

The firm is currently Zacks Rank # 2 – Buy, and it also has a longer-term recommendation of “Neutral.” A Hold rating indicates that the stock, over the next one to three months, will perform at an annualized rate of 19%, which is attractive for investors.

P/E, Earnings and ROE

In terms of valuation, the stock sells at a trailing P/E of 18.2x, trading at a premium compared to an average of 17x for the industry. To use another metric, its price-to-book ratio of 1.6x indicates a premium versus the industry average of 1.4x and the price-to-sales ratio of 1.24x is below the industry average of 1.4x. Two metrics indicate that the stock is relatively overvalued relative to its peers.

Earnings per share (EPS) decreased by 19% in the most recent quarter compared to the same quarter a year ago, to $0.68 per share for the fourth quarter of 2013. We include in the next graph the stock price because EPS often lead the stock price movement. As we can appreciate in the chart, the price performance makes the stock appealing with an upward trend over the last five years.

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Finally, I always like to see one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: the return on equity. The ratio has increased when compared to the same quarter one year prior. Let´s compare the current ratio with the peer group in the next table:

Ticker

Company Name

ROE (%)

GAS

AGL

8.62

DGAS

Delta Natural Gas Company

10.29

NJR

New Jersey Resources Corporation

12.94

ATO

Atmos Energy Corp.

9.42

PNY

Piedmont Natural Gas Company

11.31

As we can see, the firm has a lower ROE than Delta Natural Gas Company (DGAS), New Jersey Resources Corporation (NJR), Atmos Energy Corp. (ATO) and Piedmont Natural Gas Company (PNY).

Final Comment

The merger of AGL and Nicor aimed to create one of the largest natural-gas distributors in the U.S. Moreover, the diversification provided by the other businesses expands potential revenues. Finally, the increased dividend reflects the underlying strength of the firm, reflecting a year-over-year hike of 4.3%.

I would recommend investors to add AGL to their long term portfolios. Hedge fund gurus have also been active in the company in fourth quarter 2013. Paul Tudor Jones (Trades, Portfolio) has taken long positions in it.

Disclosure: Victor Selva holds no position in any stocks mentioned.


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