Is it time to take profit on these two dividend stocks?

 

AGL Energy Ltd

AGL Dividend Details
 
2016 Outlook: AGL Energy Ltd.’s (ASX: AGL)major focus for financial year 2016 is to transform itself and deliver operating costs and cash benefits. AGL Energy foresees its operational efficiency to improve further and estimates over $200 million real benefits in its normalized cost base and around $100 million reduction in sustaining capital expenditure by financial year 2017. However, the group estimates most of the cost improvements by mid of 2016. Besides, AGL also targets $1 billion in non-strategic and under-performing asset divestments and $200 million working capital expenditures by the end of financial year 2017. In the first half of 2016, the sale of AGL’s 50% interest in the Macarthur Wind Farm is also expected to be completed. For the financial year 2016, underlying profit after tax is expected to be in the range of over $650 to $720 million. New energy business unit operating loss is expected to increase by $25 million while its break even target is revised to $20 million EBIT taking into account the transfer of Energy Services as part of the organizational restructure. Restructure costs of around $30 million pre-tax are expected to be booked as a significant item.  Meanwhile, electricity, gas and REC wholesale prices are expected to rise modestly in 2016.
 
Leveraging the LNG opportunity: Recently, AGL Energy announced that it had executed an agreement with the GLNG Project participants, Total, PETRONAS, Santos & KOGAS, for the sale of 254 petajoules (PJ) of gas to the GLNG project. The gas will be supplied at Wallumbilla over a period of eleven years commencing from January 2017 with pricing based on an oil-linked formula. The annual quantities are profiled to sell up to 34 PJ/year in the period 2018 to 2020 and AGL has retained flexibility in its portfolio for future sales to its consumer market.
 

Higher generation and Queensland gas sales (Source: Company Reports)
 
Recent Management Transitions: In mid-December, it was known that AGL Energy's new energy division head, Marc England, would be leaving the company to join New Zealand based Genesis Energy as its chief executive. This could likely be a setback to the company's efforts towards the new, evolving distributed energy market. AGL planned to achieve one million smart connections by 2020 and wanted to be one of the leading providers of energy storage and home energy services. It aimed for 600 GWh of rooftop solar, and $400 million in revenue from the new energy division by 2020. Meanwhile, England will stay in his current role until the end of April 2016 to ensure a smooth transition, with Alistair Preston, currently the head of organisational transformation, to run the division on an interim basis.
 
Delivered a Positive Business performance: In the financial year 2014-2015, AGL Energy's financial performance was highlighted by its New Energy division through which it closed under-performing areas like closing AGL Smarter Living Stores in order to focus on connected products. Also, solar PV revenue recorded a 23% yoy increase during the period while commercial energy efficiency project revenue rose 41% on a yoy basis. AGL reported a final dividend of 34.0 cents per share, which brings the total dividend for the year 2015 to 64.0 cents per share, delivering one cent per share from 2014 levels. With the sale of Macarthur wind farm in first half of 2016, the proceeds are expected to repay $324 million of Loy Yang senior debt.
 

Financial Ratios (Source: Company Reports)
 
Stock performance: AGL Energy shares have recorded a gain of 15.67% in the past six months (as of December 31, 2015) while the stock has rallied 7.43% in the last four weeks alone and even reached close to its 52-week high levels. On the other hand, we believe that the stock has over rallied and trading at an expensive P/E. The market price assumptions in 2016 for Brent crude oil and for West Texas Intermediate (WTI) crude look soft and may have an impact. Based on the foregoing, we believe that the stock is under pressure and accordingly give a “SELL” recommendation on the stock at the current price of  $18.06
 
 
AGL Daily Chart (Source: Thomson Reuters)
 

Carsales.Com Ltd

CAR Dividend Details
 
Diversifying investments to build a strong geographic presence: Carsales.Com Ltd (ASX: CAR) stock is trading close to its 52-week high and delivered 17.39% in the last three months (as of December 31, 2015). CAR is still the leading online destination in buying as well as selling cars in Australia and accordingly the group’s core online advertising market rallied by 6% yoy in fiscal year of 2015. The group’s Dealer revenues rose 7% yoy to $112.9 million while Data, research and services revenues surged by 14% to $33 million driven by Livemarket and Livetrade products and Redbook Australia. Meanwhile, CAR is expanding its international presence via investments like Stratton, tyresales,Webmotors and Auto Inspect. The group acquired iCar Asia, SKENCARSALES.COM and SoloAutos in Mexico. Carsales along with Stratton acquired 20% of the Ratesetter business, a financier for short term or low priced vehicle finance for about $10 million. Dealers’ network in international segment rose through customer acquisitions as well as the group even enhanced its yield from September dealer price upsurge. The company has been able to add value to advertisers by virtue of audience reach and through the network platform, data could be sold back to car dealers.
 

Automotive Enquiry Volumes and Inventory (Source: Company Reports)
 
Guidance Commentary: CAR at its AGM, updated that the outlook provided at its FY15 results in August was reaffirmed with domestic trading performance in 1Q16 to be solid and continuity is expected to be maintained for the remaining first half subject to market conditions. CAR further updated that the international performance with Brazil and South Korea operations progressing well, has been on track. However, the company did not specifically provide any quantitative guidance in support. The company reiterated that FY 2015 margin is expected to remain consistent in the FY 2016 year. On the other hand, CAR did witness challenges with new cars with a number of car companies advising respective dealers to remove their inventory from online websites including carsales, although there has been some returning recently.
 
Stock performance: The stock performance has been boosted by CAR’s international markets’ performance coupled with domestic growth. At present, CAR is trading about its 52-week high price and at a relatively high P/E ratio, and has a dividend yield of about 3%. Given the trading scenario and the above guidance, we do not see a great upside in the near future and we give a “SELL” recommendation on the stock at the current price of  $11.74
 
 
CAR Daily Chart (Source: Thomson Reuters)

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