Avangrid: Sustained Investment Looks Like It Will Bear Fruit

Summary

  • Avangrid EPS of $1.16 per share beat estimates in Q1.
  • Margins, though, have been on the wane.
  • We go to the dividend to see if it can give us insights regarding the fundamentals of Avangrid.
  • Looking for more investing ideas like this one? Get them exclusively at Elevation Code. Learn More »

Aerogeneradores en el océano

jonathanfilskov-photography/iStock via Getty Images

If we look at a long-term chart of Avangrid, Inc. (NYSE:AGR) (U.S. Regulated & Renewable Energy Player), we can see that shares have managed to bounce off support that lasts back to the tail-end of 2016. However, due to significant two-sided trading in AGR in recent weeks, shares have not been able to give a convincing long-term buy signal through the popular MACD technical indicator. This indicator is especially prevalent on the long-term charts due to the dual function (Momentum & trend) of the indicator and the sheer quantity of information that goes into the readings.

If indeed shares can push on in upcoming sessions and take out their recent April highs, it would put the odds in favor of a strong trending move if history is something to go by. Apart from the technicals, however, monitoring trends in the key financials which make up Avangrid's dividend can give us key insights into the strength of this company's fundamentals at this moment in time. Avangrid has a proven dividend record that encompasses 21 years, so the above-average current yield of 3.7% is sure to attract investors if indeed the trends stack up.

AGR Technical Chart

Avangrid Technical Chart (Stockcharts.com)

Pay-Out Ratio

The dividend payout ratio probably offers the best insight into whether a company's dividend is sustainable or not. The reason being is that if earnings are not there to consistently meet dividend payments, then the payout will not be sustained. Over the past four quarters, Avangrid reported $818 million in net income, and $647 million was paid out to shareholders in the form of a dividend. This gives us a dividend payout ratio of 79.1%. Although this ratio is actually lower than Avangrid´s 5-year average of 99.4%, the $445 million bottom-line number in Q1 came as a result of a restructuring transaction that bloated the bottom-line earnings number artificially. Suffice it to say, although the dividend is currently being covered by earnings, trends in the areas below will give us more insights into how strong the payout really is.

Growth

For example, if we go further up the income statement and focus on operating profit, we see that EBIT growth is actually down 11% over the past four quarters. Sales though have been increasing steadily but declining EBIT has resulted in operating margins now coming in at the 11.1% mark. Declining margins are having an impact on net earnings as fiscal 2022 EPS growth is expected to be less than 1% despite the fact that fiscal 2022 sales are expected to grow to approximately $7.13 billion. Although bottom-line growth may appear stifled at present, it is good to see earnings revisions turn up over the past 30 days. Shareholders will be hoping this trend will continue going forward.

Profitability

Top and bottom-line growth and margin ramifications can only go so far when evaluating the profitability of a company. Metrics such as Avangrid´s return on equity as well as return on assets can give us better insights into how profitable a firm really is. Although Avangrid´s ROE of 4.73% & ROA of 2.07% remain above the company´s 5-year averages, they remain substantially lower (Especially on the equity side) than what the sector, in general, is trading at (8.91% & 2.48%)

Valuation

Although shares may not look that cheap from a sales or earnings perspective, Avangrid is now trading with a price to book ratio of 0.96. The problem is that Avangrid´s equity as we see above continues to underperform the sector by quite some distance. In saying this, there is always a lapse between book value growth (what Avangrid is achieving) and bottom-line earnings growth so shares may even be cheaper especially when you look at what is taking place internally within the company.

For example, management stated on the recent earnings call that in the Networks segment, Avangrid´s improving customer experience, storm response & crew efficiency will drive this segment forward and result in better outcomes for the company in general. On the Renewables side, the accretive value was realized straight away on the New England offshore wind partnership restructuring deal. Furthermore, plenty of investment is ongoing both in onshore developments as well as offshore as Avangrid continues its quest to be the leading sustainable energy company in the US.

Q1-2022 Avangrid Highlights

Avangrid Q1 Earnings Presentation (Company Website)

Conclusion

To conclude, when we look at the "Total Return" potential of the firm's dividend, a few trends come to our attention. While dividend payments are currently being covered by earnings, margins have been slipping at the company despite the fact that revenues have been growing. Nevertheless, rising earnings revisions off a low valuation are always welcome especially when shares have recently tested support successfully. Let's see if the company can beat Q2 estimates. We look forward to continued coverage.

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My name is Jack Foley and I primarily write and research investment commentary as well as trade the markets. I'm Irish but live in Madrid, Spain with my beautiful wife and 2 children. I believe to be successful at this game, one has to have real passion for the markets and be constantly reading and researching material. From fundamentals analysis to technical analysis, options or futures, income or capital gain, long term trading or day trading, there is something for everyone in the markets depending on one's respective goals. "Starting with the end in mind" is a great mindset to start your investment career with respect to ascertaining exactly what you want to get out of the markets. Write down what you want and how quickly you want it. Therefore depending on the capital you are starting out with, you will then know what levels of risk you need to take. Whatever doubt or query you may have, I'm here to help. Shoot me an email in the contact tab and I'll come back to you as soon as possible

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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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