This morning, budget airline easyJet (LSE: EZJ) announced that it will increase its dividend payout ratio from 33% to 40% of post-tax profits, from this year onwards.
Assuming the company meets market expectations for profits this year, easyJet’s total 2014 dividend should rise from 37.6p to 44.9p per share, which equates to a prospective yield of 3.3%.
This compares very favourably to British Airways owner International Consolidated Airlines Group (LSE: IAG), which offers a puny prospective yield of 0.3%, and Flybe Group (LSE: FLYB), which doesn’t even pay a dividend.
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Profiting from airlines
Airlines are notorious for their collective inability to make reliable profits: both Flybe and International Consolidated have lost money for two of the last five years.
Against this backdrop, easyJet’s consistent profitability — like that of its peer Ryanair (LSE: RYA) — is impressive. So is easyJet the best buy for investors?
Let’s take a closer look:
| easyJet | International Consolidated |
Flybe | Ryanair | |
|---|---|---|---|---|
| Historic adjusted P/E | 13.7 | 21.4 | 108 | 19.9 |
| Operating margin | 11.7% | 4.1% | 0.2% | 13.1% |
| 2014 forecast P/E | 12.2 | 12.1 | 14.9 | 15.3 |
| 2014 forecast earnings per share growth | 12.5% | 81% | 630% | 29.7% |
easyJet’s share price has fallen by more than 20% from its April peak, and the airline looks much more reasonably priced today, with a yield and prospective P/E which are broadly in-line with the FTSE 100 average.
Personally, I wouldn’t want to pay more than this for easyJet, as I believe airlines will always be under too much cost pressure to outperform the market over the long term. However, easyJet does look increasingly attractive as an income play.
International Consolidated and Flybe, on the other hand, are turnaround stories in mid-flight, in my view.
Both firms had difficult years last year and look expensive against historic earnings, but are expected to deliver strong earnings growth this year and in 2015 — Flybe trades on a 2015 forecast P/E of just 7.3, while the equivalent figure for International Consolidated is 8.1. If they deliver on these profit forecasts, I’d expect both firms’ share prices to move significantly higher next year.
Ryanair looks least attractive — fully priced and without a history of regular dividends, I’d steer clear.
The verdict
In my view, easyJet remains an attractive income option at today’s price, and although an airline stock is not a conventional choice for income, I believe easyJet might be able to sustain its strong track record.
For growth investors, Flybe and International Consolidated both look promising, but I’m leaning towards the small-cap simplicity of Flybe, which trades with net cash, at a low price-book value ratio, and could turn out to be a textbook recovery play over the next couple of years.
