Shares in British Airways owner International Consolidated Airlines (LON: IAG) (IAG.L) have enjoyed a strong run in 2017, rising almost 40% since the beginning of the year.
Often, when a stock rises that fast, you can wave goodbye to any dividend value, as the share price increase pushes the yield down to a level that is no longer attractive. However, in this case, value still appears to be on offer, with the forecast dividend yield sitting above 4%.
Formidable dividend growth
The airline owner paid out dividends of €0.21 last year, and City analysts expect the company to raise the dividend by an impressive 33% this year to €0.28. At the current share price and GBP/EUR exchange rate, that equates to a yield of 4.1%. Furthermore, dividend coverage is anticipated to be strong, as the consensus FY2017 earnngs figure of €0.96 gives a coverage ratio of 3.4 times.
Of course, airline stocks come with plenty of risks that investors need to be aware of. Volatile fuel costs, increased terrorism threats, competition from rivals and Brexit ramifications could all potentially derail profitability and put the dividend at risk.
However, the company appears to have momentum at present, with recent half-yearly results showing a 26% rise in adjusted earnings per share, and management stating that it expects operating profit for 2017 to show a double-digit percentage improvement year-on-year.
The stock is trading on a forward looking P/E ratio of just 7.1, which doesn’t look expensive in my view. With that in mind, the risk / reward skew from a dividend investing point of view looks attractive in my opinion.
Disclosure: Edward Sheldon, CFA has no position in International Consolidated Airlines.
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.