When we put together the AE Portfolio in September 2011, we focused on top-quality dividend-paying stocks you could use to build long-term wealth.

We started with eight companies, including both of this month’s Sector Spotlight subjects, Aggressive Holding GrainCorp Ltd. and Conservative Holding AGL Energy Ltd. (ASX: AGL, OTC: AGLNF, ADR: AGLNY).

Both stocks started out as solid gainers before running into headwinds.

For GrainCorp, it was the Australian government’s refusal of a big takeover offer from Archer Daniels Midland. 

A Trifecta of Troubles

AGL’s slowdown was a little different—the result of a series of speed bumps that combined to drag down the stock late last year.

For one, the company’s fiscal 2014 results were hurt by a warm start to the winter Down Under, which cut power and gas demand.

Secondly, analysts were unimpressed with AGL’s AUD1.505 billion acquisition of Macquarie Generation (or MacGen), a collection of power plants owned by the state of New South Wales. The deal closed on September 2, 2014.

And finally, last July AGL said the repeal of Australia’s carbon tax would cut AUD200 million from its fiscal 2015 earnings.

Weighed down by these concerns, the stock slumped to a 4½-year low on Dec. 12, 2014.

Cue the Comeback

But in the two months that followed, AGL jumped 17% on the Australian Securities Exchange as value seekers bet that Aussies would crank up the air conditioning to cope with a hotter summer.

Even after the jump, AGL trades at just 15.85 times its forecast fiscal 2015 earnings and 1.12 times book value. And this solid long-term dividend grower is yielding 4.2% at current levels.

So where does that leave us? With a company that boasts strong value, reliable income and management that’s ready to add key assets to support long-term growth.

And going by AGL’s fiscal 2015 first-half results, business is on an upswing.

For the six months ended Dec. 31, 2014, underlying net profit after tax (NPAT) rose 24.8% from a year ago, to AUD302 million, while underlying earnings per share rose 14.1%, to AUD0.477.

The retail division chipped in operating earnings before interest and taxation (EBIT) of AUD159 million, up 16.9%. AGL sold 7.5% more gas to consumers as winter weather returned to normal. Electricity volumes slipped 2.3%, though improved margins offset lower demand.

Competition remained fierce on the retail side, but AGL’s moves to keep clients loyal are paying off: The company’s “churn,” or customer turnover, held steady at 15.4%, widening the gap with the rest of the market to 5.6%. Average customer count also grew by 2.2%, while operating EBIT per client rose 14.3%.

Meanwhile, the merchant segment’s operating EBIT grew 20.6%, despite a reduction of AUD87 million due to the carbon tax repeal. MacGen added AUD51 million, and Queensland wholesale gas posted sales growth of AUD62 million.

Management stood by its guidance for full-year underlying NPAT of AUD575 million to AUD635 million. The midpoint of that range is up 7.7% from fiscal 2014. AGL also declared an interim dividend of AUD0.30 per share, a 4.4% year-over-year hike.

Key Projects Moving Ahead

AGL’s growth hinges on investing in big new facilities.

For example, the 50%-owned, 302-megawatt (MW) Diamantina Power Station started up in October 2014 and is now generating power under long-term contracts. 

Elsewhere, the Newcastle Gas Storage Facility, a key piece of New South Wales’s energy infrastructure, is on track for full operation by mid 2015.

And in the fourth quarter, AGL will decide whether to go ahead with its Gloucester gas project, a key part of its plan to develop long-term gas supplies for its power plants and other businesses. If it gets the go-ahead, Gloucester will start up in the second half of 2018.

AGL is also building two solar projects: the 102 MW Nyngan plant and the 53 MW Broken Hill facility, both of which will be finished this year.

Taking a Shine to Solar

One fact that jumped out from the company’s latest earnings report is that the average Australian household continues to cut its power use, largely due to energy-efficient appliances and the spread of rooftop solar.

New houses are particularly efficient, using 37% less power than the national average. 

And average consumption per customer fell another 4.4% in the first half, extending a decline that’s now five years old.

Crucially, AGL is taking a long view that will help it weather these changes. It has also created a new division, New Energy, to manage its move into rooftop solar, home energy-management systems, digital meters and battery storage.

Retiring CEO Michael Fraser, who handed the reins to former AES Corp. chief operating officer Andrew Vesey on February 11, noted during AGL’s first-half conference call that battery storage for rooftop solar systems is already an “interesting” proposition for consumers.

“We see battery-storage technology going ahead in leaps and bounds,” said Fraser, who feels this paves the way for “significant” and “fundamental” change in the energy market.

There’s considerable skepticism about how close battery storage is to viability.

“History shows that (such technologies) start slow but then take off faster than anyone expects,” noted Fraser. “We are positioning ourselves for that.” 

Meantime, the company keeps investing in promising new projects, widening its lead on rivals and fine-tuning its efforts to keep customers loyal. 

That’s setting the stage for higher earnings—and dividends—in the long run.

AGL Energy is a buy up to USD16.