Long-term holders of International Consolidated Airlines (LSE:IAG) shares haven’t received a dividend since before the pandemic. But dividend forecasts from City brokers suggest this is about to change.
The FTSE 100 airline operator is tipped to get the ball rolling with a 3.3-cents-per-share dividend in 2024. And what’s more, the number crunchers expect dividends to soar in 2025 from this year’s expected levels, to 6.1 cents per share.
On the downside, 2024 and 2025 projections carry dividend yields of just 1.9% and 3.4%, respectively, based on the current IAG share price. Both figures fall short of the 3.8% forward average for FTSE 100 stocks.
So should I buy the British Airways owner for my portfolio today?
Strong forecasts
The first port of call is to check how robust those dividend forecasts are. And the good news is that predicted payouts are well covered by anticipated profits.
Predicted earnings per share of 37 euro cents dwarf that anticipated 3.3-cent reward. And for 2025, earnings are forecast at 43 cents and dividends at 6.1 cents.
Any reading showing coverage of 2 times and above by expected earnings provides a margin of safety. IAG’s readings are well clear of this benchmark.
High dividend cover is especially important for cyclical companies like airline operators. Profits can fall unexpectedly and sharply if company-specific or industry-wide problems develop.
On top of this, recent efforts by IAG to rebuild its balance sheet give dividend forecasts added robustness. Its net debt had fallen to just over €8bn by September thanks to improving cash flows. This was down from €10.4bn a year earlier, and meant net-debt-to-EBITDA fell to an undemanding 1.4 times.
Possible turbulence
There’s no doubt that the business has the wind in its sails right now. The post-pandemic travel recovery continues to confound expectations, and IAG’s revenues and operating profits leapt 18% and 43% respectively during Q3.
But the past isn’t a reliable indicator of future performance, of course. And the firm faces significant challenges that could pull its share price lower and endanger current dividend forecasts.
For one, long-haul operators like this may be forced to slash fares as the global economy cools. While it also owns budget airline Vueling, this only makes up a small percentage (12.6%) of total operating profit.
So unlike dedicated European low-fare operators like easyJet, IAG is more vulnerable to pressure on consumers’ wallets.
So should I buy?
IAG’s customer numbers are also under threat from the ultra-competitive nature of the airline industry. In fact, expansion in the long-haul segment has rocketed following the pandemic, increasing the threat to the BA owner.
Rising costs — and in particular the constant threat of soaring oil prices — are another potential risk to profits and dividends. So is the ever-present danger of strike action by airport staff, pilots and cabin crew.
And finally, while debt has been falling of late, management could remain focused on reducing the company’s borrowings over the short-to-medium-term. And this could come at the expense of dividends.
I’ll be keeping a close eye on IAG. But I think there are better FTSE 100 dividend shares for me to buy.
