New Morningstar Analyst Report for AGL Energy Limited

AGL Energy is one of Australia's largest integrated energy companies and the oldest company listed on the Australian Securities Exchange. Key attractions include stable profits, regular dividends, and low gearing. Its products are considered necessities by most customers, making earnings highly defensive. Management's preferred return metric is the low-double-digit return on funds employed, or ROFE, which excludes dormant gas reserves. We forecast adjusted return on invested capital, or ROIC, to exceed the weighted average cost of capital for the foreseeable future, thanks to low-cost generation; this justifies a sustainable competitive advantage, or economic moat. Profit (earnings before interest and taxes, or EBIT) is dominated by energy generation and procurement (wholesale markets), with energy retailing about half the size, and energy infrastructure assets divested in 2006. Strategy is heavily influenced by government energy policy, such as the renewable energy target, or RET. Growth opportunities and competition increased following the privatisation of government-owned energy assets and the deregulation of energy markets. Strong operating cash flow enables regular payment of fully franked dividends, an enhanced attraction in a declining-interest-rate environment.