According to an expert, AGL’s true power is conglomeration. But it’s a power the company will lose when it structurally separates.
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Former CEO of the Australian Energy Council, the Energy Supply Association of Australia, and the Clean Energy Council, Matthew Warren, says the company’s troubles are brought about by “fundamental changes to how and where energy is produced”.
Warren’s opinion piece – published by the Australian Financial Review – noted the future energy market is likely to be consumer-driven, potentially leaving energy giants without profits.
The AGL share price closed yesterday’s session trading for $7.91. That’s 61% lower than it was five years ago.
Let’s take a closer look at Warren’s insight into AGL’s plight.
Is AGL’s split a major mistake?
According to Warren, AGL’s intention to split its business into a retail company and an energy-generating company will only cause more pain. He said:
Like record shops, video libraries and afternoon newspapers, AGL is being left behind as the energy market is leapfrogging to new technologies.
Warren’s opinion is simple. As technology advances and becomes more affordable, more Australians will turn to making their own electricity.
Indeed, many already do. According to the Australian Renewable Energy Agency, more than two million Australian households have rooftop solar.
And Warren says this will take away the benefit that major energy companies have – size.
This will likely spell disaster for AGL shares.
Australia was once dependent on coal. That dependence saw companies like AGL, and its share price, flourishing. Particularly, as coal needs massive operations and billions of dollars worth of infrastructure to generate power.
However, as the CSIRO has found, renewable energy is cheap when compared to fossil fuels. Warren says this means new companies have emerged in the once bare energy industry, and they’re able to get a foothold quickly, as are ordinary Australians.
Warren also argues that splitting AGL into two businesses will take away its major power – conglomeration.
The energy companies of yonder took advantage of swings in energy prices. If energy prices went up, energy generators were better off. Whereas, if energy prices fell, retailers lined their pockets.
AGL used to make money no matter what the market was doing.
But after it splits, the AGL share price may face much darker days.
AGL share price snapshot
The AGL share price has seriously flopped recently.
AGL shares have fallen 34% since the start of 2021, and 54% since this time last year.
The company has a market capitalisation of around $4.9 billion, with approximately 623 million shares outstanding.
Should you invest $1,000 in AGL Energy right now?
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AGL (ASX:AGL) share price checks in at new 52-week low
The AGL share price is now trading on a 10% dividend yield
Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned.
The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.