International Consolidated Airlines is forecast to lift its dividend by 23%

International Consolidated Airlines dividend withholding tax

Dividend growth within the FTSE 100 is certainly not prolific at the moment. Many key dividend stocks such as Royal Dutch Shell, BP, GlaxoSmithKline and HSBC Holdings have frozen their dividend payouts in recent years.

However, one stock that has hiked its payout at an impressive rate in recent years, and looks set for further growth this year, is British Airways owner International Consolidated Airlines (LON: IAG).

Over the last two years, the airline owner has paid dividends of €0.20 and €0.235 per share, and the City expects a large dividend increase for FY2017.

23% dividend growth forecast

This year, analysts forecast a payout of €0.29, growth of a formidable 23%. At the current share price and exchange rate, that equates to a nice yield of 4.2%. Coverage is expected to be 3.4 times, based on earnings of €0.99 per share.

Don’t forget the withholding tax

However, one thing to keep in mind, is that IAG’s dividend is subject to a Spanish withholding tax. It’s quite a hefty tax at 19%, and UK investors have to pay it. IAG says on its website:

8. Do I have to pay Spanish tax if I am an IAG Shareholder tax resident in the UK?
As a Spanish Company, IAG shareholders will be subject to the Spanish tax regime in relation to any dividends or gains on IAG shares. UK tax resident IAG shareholders will also be subject to the UK tax regime.

So from last year’s payout of €0.235, investors actually received €0.19.

If the tax rate is the same this year, and the company delivers on the €0.29 forecast dividend, the post-tax payout will be around €0.235, which is a yield of 3.4% at the current share price.

It’s definitely worth keeping that tax in mind, as a 3.4% net yield is obviously less attractive than a 4.2% yield.

Other issues

A couple of other issues worth noting in regards to IAG:

First, the company has quite a significant debt pile. Total long-term debt at the end of 2016 was €7.6bn vs equity of €5.4bn.

Also, the airline sector is quite capital intensive. The industry requires large sums of capital to operate effectively. For example, over the last two years, IAG generated operating cash flow of €1,968bn and €2,465bn. However, capital expenditures in those years were €2,040bn and €3,038bn.

These are issues to keep in mind if you’re a dividend investor, as debt obligations and capital demands can affect a company’s ability to make dividend payments.

Disclosure: Edward Sheldon, CFA owns shares in Royal Dutch Shell and GlaxoSmithKline. 

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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