At a time when inflation is soaring at over 7% while the stock market remains depressed, investors alike will be looking for other ways to grow their wealth. One such way is to invest in dividend stocks that have the potential to generate passive income. This FTSE 250 constituent stands out to me in this regard.
An easy decision
easyJet is on the cusp of returning excess capital to shareholders. CEO Johan Lundgren is expected to announce this at the end of the year. This should open a passive income opportunity for investors, as the budget airline continues to put in stellar performances.
Passenger traffic is nearing pre-pandemic levels and demand for easyJet’s expanding ancillary products continues to take off. Therefore, it’s no surprise to see the FTSE 250 company continuing to post solid results, beating analysts’ expectations in Q3.
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Yet doubts linger in investors’ minds, weighing down the stock. Competitor woes, air traffic control strikes, and rising fuel costs have led some to question easyJet’s outlook. This has also led to questions being raised about its return to dividend payments.
Nonetheless, smooth flying conditions seem likely ahead. Winter bookings are up over 100% and there are plans to increase capacity by 15% this winter. As a result, easyJet looks to stay profitable during this traditionally slow season — a rarity given its poor track record during the colder months.
On that basis, it’d be reasonable to ascertain that the recent drop in its share price could signal a smooth buying opportunity for the FTSE 250 stalwart.
Room to fly higher
Currently, consensus estimates are for easyJet to pay a dividend of 19.6p per share in FY24. This effectively gives easyJet shares a healthy 4.4% dividend yield. However, this could see a reasonable jump if profits come in better than expected.
One catalyst for this is its Holidays business. The business has doubled sales and profits over the past year. Consequently, the FTSE 250 firm now expects over £100m in pre-tax profit from Holidays this year, having seen the board upgrade its profit guidance multiple times over the course of the year.
With the launch of Holidays in Birmingham next summer as well, easyJet aims to jet past its competitors in the packaged travel market. While some express concerns about the impact of rate hikes on discretionary spending, Holidays caters well to travellers seeking affordable trips and cautious budgets.
The best FTSE 250 pick?
Overall, easyJet seems well-positioned to soar to new heights. Rising fuel costs could eat into its bottom line and hamper payouts, but it’s worth noting that easyJet has strong hedges in place. With most fuel secured below current prices until 2025, the group has visibility on keeping its expenses in check.
Its industry-leading balance sheet also provides financial flexibility to adapt to changing conditions. This should give investors seeking passive income more assurance that payouts are well backed by its finances and earnings.
As such, the travel operator is poised to emerge from its current turbulence in an even stronger position. So, the recent drop in its share price could signal a buying opportunity for this high-flyer with tremendous potential to generate meaningful passive income.
