IAG (LSE: IAG) shares have had a rough ride since British Airways merged with Spanish airline Iberia to from the conglomerate in January 2011.
International Consolidated Airlines Group, to use its full unwieldy name, traded at around 180p back then. Today, I can buy the stock for less than 152p. I love buying dirt cheap shares, but is this a step too far for me?
Recent years have been tough on every airline. The pandemic wreaked havoc, grounding fleets. Travel has taken time to recover, and boards can’t just mothball an airline or two, then deliver instant take-off. IAG, which also owns Aer Lingus and Vueling, was always going to be less nimble than the smaller, budget carriers.
Turbulence all the way
After Covid came the energy shock, which sent fuel prices soaring, followed by the cost-of-living crisis, which hit demand. Now the world is flirting with recession, which won’t do much for travel, either.
If I’d invested £5,000 in IAG shares in November 2018 – and I seriously considered doing just that – I’d be sitting on a 65.37% loss today. My stake would be worth just £1,731.50. I’d have lost £3,268.50. That was a close call.
Normally, I’d do a few rough sums to see how much I would have earned in dividends too, but there’s little point. IAG halved its dividend per share from €0.31 to €0.15 in 2019, then ditched it altogether in the pandemic. It hasn’t paid a penny since.
So much for near misses. The big question now is whether IAG shares are worth buying at today’s reduced price. The stock is up 12.26% over the last year, but it’s falling again down 7.79% in a week. A bumpy ride seems assured for some time to come.
Yet there are positive signs. On 21 November, CEO Luis Gallego pledged to resume paying dividends once its balance sheet and investment plans are “secure”. That’s nice to hear but I’d prefer something I could hang my hat on, like a date. Analysts are predicting a yield of 1.92% by 2024, though. For the record, easyJet has now restarted its dividend. It’s net cash too.
Looks like a long haul
Gallego’s positive words followed upbeat results on 27 October, including record-breaking Q3 operating profit of €1.745bn, up 43.5% year on year as flight demand picks up. Operating margins jumped from 16.6% to 20.2%, with flights at 95.6% capacity. Yet the response to Q3’s bumper increase was downbeat. This may be as good as it gets for now.
The big attraction is that IAG shares are ridiculously cheap, trading at just 3.8 times forecast 2023 earnings. That’s one of the lowest P/E ratios on the FTSE 100. Yet IAG investors still face a long and bumpy ride, as the company’s net debt hit €11.6bn in 2021. It’s forecast to have fallen to €9.41bn in 2023, then €8.89bn in 2024. The balance sheet recovery is going to be a slow process, and this will eat into shareholder returns.
Sorry, but I’m not convinced. IAG remains exposed to oil price uncertainty, economic worries and geopolitical tensions, and there’s no dividend to compensate. I’ll keep a close eye on its share price, but I’m not buying today.
The post If I’d invested £5k in IAG shares 5 years ago here’s what I’d have now appeared first on The Motley Fool UK.
Like buying £1 for 51p
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See the full investment case
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Harvey Jones 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.
