Is this FTSE 100 stock and its 4.5% dividend too cheap to ignore?

Is this share a bargain in these volatile markets, or should I shop elsewhere?

 

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

One FTSE 100 company with an almost unbelievably low-looking valuation is airline operator International Consolidated Airlines Group (LSE: IAG). The shares are perky today, up around 5%, as I write, on the release of the third-quarter results report, which delivered figures for the nine months to 30 September.

Revenue rose a little over 5% compared to the equivalent period last year, operating profit before exceptional items increased by 7.3%, and adjusted earnings per share moved 12.5% higher. During the period the firm completed a “second” €500m share buyback programme and the directors declared an interim dividend 16% higher than last year. The firm looks like it has made decent progress but today’s share price around 603p is some 10% below where it was a year ago.

How IAG has earned its low valuation

Chief executive Willie Walsh said in the report the results are “strong” despite “significant” headwinds from the cost of fuel and the variability of foreign exchange rates. So, with the underlying business performing well, why isn’t the share price higher? The forward earnings multiple for 2019 values the firm at around six times earnings and the forward dividend yield runs close to 4.5%. Cheap, at first glance, but does the firm deserve its low valuation?

Should you invest £1,000 in BP right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if BP made the list?

See the 6 stocks

I think it does. Revenue, earnings and cash flow have been advancing for several years, but the rate of growth in earnings has been declining: 95%, 79%, 27%, 12%, 9%, and City analysts following the firm are expecting a flat earnings result for 2019, so zero percent. Meanwhile, the price-to-earnings ratio has declined a little every year as earnings have been rising. It’s classic behaviour for a cyclical share. As profits rise, probably to their peak value, the stock market tries to anticipate the next cyclical plunge by trimming the firm’s valuation.

Who knows when fuel prices, currency rates and falling demand will pull the rug from IAG’s profits and send the shares into freefall? The worst time to buy a cyclical share like this is when the valuation is low after a long period of strong profits, according to one-time outperforming US fund manager Peter Lynch in his book Beating the Street.

A death trap for investors?

Meanwhile, the Oracle of Omaha, Warren Buffett, was very specific about airlines at the 2013 Berkshire Hathaway annual shareholder meeting. He said: “Investors have poured their money into airlines for 100 years with terrible results. It’s been a death trap for investors.” He had previously explained in his 2007 shareholder letter that “the worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines.”

Indeed, the industry is characterised by fierce competition and capital-intensity, and airlines such as IAG can do precious little to carve out a competitive advantage. I think IAG looks dangerous for investors right now so I’m avoiding the stock. However, I do think the current weakness in the stock market is a good opportunity to drip regular money into the market. But instead of taking on individual company risk by investing in IAG, I’d rather go for a FTSE 100 index tracker fund.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Older couple walking in park
Investing Articles

Could £300 a month invested in US and UK shares reach a million by retirement?

Could an investor retire with a million pounds just by dedicating £300 a month to US and UK shares? Mark…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Is £800 enough to start an ISA?

Is it worth bothering with an ISA with less than £1,000 to spare? This writer believes it may be --…

Read more »

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »