International Consolidated Airlines (LSE:IAG) hasn’t paid a dividend on its shares since before the pandemic. However, City analysts think all this is about to change.
Not only do they expect the travel giant to restore dividends this year. They predict that cash rewards will grow sharply over the next three years:
| Year | Dividend per share | Dividend growth | Dividend yield |
|---|---|---|---|
| 2024 | 6.20p | N/A | 2.9% |
| 2025 | 8.44p | 36% | 3.3% |
| 2026 | 9.15p | 8% | 3.6% |
These bright estimates reflect IAG’s impressive balance sheet repairs. They also underline expectations that profits will continue rising through the period.
However, dividends are never, ever guaranteed. And the FTSE 100 company may face growing headwinds as we head into the New Year.
So how realistic are current payout projections? And should I buy IAG shares for my portfolio?
Solid forecasts
The first, and simplest, thing to consider is how well estimated dividends are covered by forecasted earnings. As an investor, I’m looking for a multiple of two times or above, which provides a wide margin of safety.
Pleasingly, the company scores well on this metric. Dividend cover is a mammoth 6.9 times for this year. And while it falls thereafter, it stays at a formidable 5.2 times and 5 times for 2025 and 2026.
So far so good. But how stable are the British Airways owner’s financial foundations?
Well International Consolidated still has a decent amount of debt on its books. As of September, net debt stood at €6.2bn. But as I alluded to, work to improve the balance sheet has been quite epic.
Net debt has dropped sharply from €9.2bn at the start of 2024. As a result, the firm’s net-debt-to-EBITDA ratio has dropped to one times from 1.7 times over the period.
Signalling its improved financial health, the firm announced a €350m share buyback programme alongside November’s third-quarter trading update.
Is it a buy?
On balance, then, International Consolidated currently looks in good shape to hit these payout forecasts. But does this mean I should buy its shares today?
Well aside from dividends, I can see other reasons why the leisure giant is appealing to investors today.
With British Airways, it has one of the strongest airline brands on its books, and one that gives it great exposure to the lucrative transatlantic market. It also has exposure to the fast-growing budget sector through Vueling and Aer Lingus.
Finally, its shares look dirt cheap despite soaring almost 70% over the past year. They trade on a forward price-to-earnings (P/E) ratio of 6.1 times.
Yet despite this, I’m reluctant to add the shares to my portfolio. The economic outlook for 2025 is far from robust, given signs of stubborn inflationary pressures that could limit interest rate cuts. Potential trade tariffs in the US, allied with ongoing weakness in China’s economy, offer other threats.
This is especially worrying for airline shares, given that holiday spending is one of the first things to be cut during tough times.
There are other factors that make me uncomfortable about owning airline stocks. Volatile fuel prices, geopolitical events that impact flight routes, industrial disputes, and regulatory changes are evergreen traps that can all substantially impact revenues and profits.
Investing in any stock involves taking on risk. But right now, the dangers associated with IAG shares are too high for my liking.
This post was originally published on Motley Fool
