Stock of the week: International Consolidated Airlines
You won’t have opened a paper or visited a website over the last few weeks without seeing a news story about an airline. The sector has had a lot to contend with given the recent demise of one of the UK’s largest budget airlines, Monarch, and Ryanair cancelling flights in light of an ongoing dispute with its pilots. It appears the market remains nervous about the sector – an upbeat trading statement from EasyJet last week resulted in the shares dropping.
However, it’s not all bad news for the sector and investors interested in it. Our long-term preference, International Consolidated Airlines, is finally seeing the internal structural changes that it initiated a few years ago paying off, growth opportunities are being pursued and dividends are expected to rise in the coming years. All of this combined puts the British Airways owner, at least in our view, sky high above the rest.
There’s no denying that these are challenging times for airlines. Excluding the issues raised above, IAG has had to contend with economic uncertainty, Brexit, foreign exchange movements and terrorist attacks. However, interested investors should recognise that its most recent figures indicated that operating profits and passenger unit revenues were up. These numbers are particularly impressive given the adverse currency movements and the power failure at British Airways earlier in the year.
The shares trade on a prospective 2018 PE of 6.4, which makes the shares better value than rivals such as EasyJet and Ryanair. The prospective dividend yield of 4.3% is above average and investors should recognise that dividend payments have restarted and are expected to rise above inflation over the next three years.
We believe that in addition to the above, the potential growth from one of its other businesses Aer Lingus, a restructured Iberia and the new LEVEL airline all provide attractions to investors looking in to the sector. As a result, we recommend International Consolidated Airlines as a ‘buy’ for growth-seeking investors willing to accept a higher level of risk.