The price of easyJet (LSE:EZJ) shares has fallen by just over 41% since the beginning of the year. But investing isn’t about what will happen to the price of a stock over a few weeks or months.
As Warren Buffett tells us, the success of an investment depends on what the business does over time. So if I’d bought easyJet shares five years ago, how much would I have now?
Past performance
Let’s start with the easyJet share price. The stock currently trades at £3.55 per share, compared to £10.21 five years ago.
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That’s a decline of around 65%, which means that I could sell my initial £1,000 investment for around £350 today. That isn’t terribly inspiring, but it’s not the full story.
Until recently, easyJet paid a dividend to its shareholders. That’s something else to factor into my return calculation.
Five years ago, £1,000 would have bought me around 98 shares. Since then, easyJet has paid out £1.97 per share in dividends to its shareholders.
Assuming I didn’t reinvest the dividends I received in more easyJet stock, I’d have received around £193 in dividends. Adding that to my £350 worth of shares gives me a total return of £443.
That’s a loss of around 56%, which is not great. It’s significantly worse than the FTSE 100 (which easyJet was part of five years ago).
With the company no longer paying a dividend, the prospect for future returns depends on the share price. So is there reason to think that easyJet shares can generate a good return from here?
Future returns
With easyJet shares down 65% over the last five years, there’s a gain of around 185% to be had if the stock can recover to its 2017 levels. But I think this is unlikely.
While the company’s revenues might recover to where they were five years ago, I think there are some deeper issues. These are debt and the number of shares outstanding.
Right now, easyJet has just over three times the long-term debt it had five years ago. That means that the company is in a weaker position even if it recovers its previous earnings power.
In addition, easyJet has issued a lot of shares over the past five years. The company’s share count is just under 760m, up from around 400m.
In my view, this is the biggest obstacle to easyJet’s share price recovering its previous highs. The business now needs to generate 90% more cash to achieve its previous level of earnings per share.
A stock to buy?
I don’t anticipate adding easyJet shares to my portfolio any time soon. The argument that the business has a bright future as travel demand recovers doesn’t convince me.
I think it’s certainly true that easyJet’s revenues will increase significantly from their current levels. But the business looks fundamentally different to how it was five years ago.
The amount of debt and the increased share count put me off investing in the stock. I think that there are better options available for my portfolio.
