The International Consolidated Airlines (LSE: IAG) share price continues to fall. Investor concerns over the global economy and soaring inflation have pulled it firmly into penny stock territory.
At 95.8p per, IAG’s shares are now 38% cheaper than they were at the start of the year.
Having said that, the British Airways owner still remains a popular share with many investors. Should I consider buying it ‘on the dip’ for my own portfolio? And should I buy the FTSE 100 firm for next year’s dividend?
Dividends returning?
You might be tempted to think that I’ve banged my head. But City analysts do indeed think the business will start paying dividends again. Thats despite the uncertain outlook for the travel industry and the fact that IAG is swimming in debt.
Following the onset of Covid-19, the company axed the final dividend for 2019. This resulted in a total payment of 14.5 euro cents per share for the year, down from 31 cents in 2018. And it hasn’t paid any dividends since.
Brokers believe that IAG, which also had a history of paying large special dividends up to the pandemic, will restart shareholder payouts from 2023. A 1.1-cent-per-share dividend is currently forecast, leaving the company with a 1% dividend yield.
Solid forecasts
Clearly IAG’s yield isn’t the largest out there. In fact, it lags the 4.2% average for FTSE 100 shares by a wide margin.
But on the plus side there’s a great chance that the business will meet next year’s dividend target. It’s expected to bounce back into profits in 2023 following three years of losses. And so that predicted dividend is covered a massive 15 times by expected earnings.
I wouldn’t buy IAG shares based on next year’s dividend alone. But would I buy the company in anticipation of robust dividend growth in the years ahead?
Again, the answer is no.
Fragile recovery
News coming out of IAG has been pretty positive of late. In the first half of 2022 it returned to profit as the travel industry rebound continued. Its Iberia and Vueling divisions in particular thrived as travel in Spain and to Latin America roared back (demand in June was actually ahead of 2019 levels).
However, this recovery is in jeopardy as the global economy teeters towards recession. Spending on expensive long-haul holidays and business travel could plummet again in the short-to-medium term amid rocketing inflation.
At the same time, IAG is facing extreme cost inflation in areas like staffing and fuel that might hit profits hard.
Debt questions
The threat of a stalling travel sector is particularly concerning given the huge amount of debt IAG has. While falling over the past year, this still sat at an enormous €11bn as of June. This has the potential to disappoint investors hoping for solid dividend growth beyond 2023.
I like the exceptional brand strength of its airlines like British Airways. And I like its expansion in the fast-growing budget carrier space. But all things considered, I think IAG is far too risky to buy today.
The post Should I buy IAG shares for the returning dividend? appeared first on The Motley Fool UK.
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Royston Wild 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.