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IAG - special dividend announced

George Salmon | 28 February 2019 | A A A
IAG - special dividend announced

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

International Consolidated Airlines CDI

Sell: 101.05 | Buy: 101.15 | Change -8.30 (-7.61%)
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International Consolidated Airlines (IAG) has reported adjusted operating profit of EUR3.2bn, broadly in line with prior market expectations. That represents growth of 9.5%, despite a EUR 129m foreign exchange headwind.

The proposed final dividend is EUR 0.165 per share, with a special dividend of EUR 0.35 also announced.

The shares moved marginally higher on the news.

View the latest share price and how to deal

Our view

The dominant theme amongst airlines recently has been a relentless increase in capacity, which is raising competition and forcing prices down.

Not at IAG though. A focus on long-haul destinations, plus its more upmarket flagship brands, have helped it stay clear of the brawl. We've seen eye-catching operating profit growth, with lower fuel costs boosting returns.

However, the upward trend in oil prices means that tailwind is fading fast. This puts the emphasis on IAG to limit increases in non-fuel operating costs. Recent updates have brought good news on this front, and the group is confident we won't see a reversal.

While IAG delivered a stellar performance last year, investors should remember demand for First and Business class berths turns off and on like a tap as the economy rises and falls. That makes uncertainty following the vote to leave the EU a worry. Regardless of whether the planes are full or not, the group will have to service its lease and debt obligations.

Perhaps with the inherent cyclicality of running a premium airline in mind, IAG is exploring building out lower-cost services. LEVEL and Vueling are growing, while transatlantic flights from Barcelona have kicked off its first foray into the low-cost long-haul market.

IAG had wanted to bolster its offering by acquiring rival operator Norwegian, but after at least two failed approaches decided the price wasn't going to be right. With leverage well within the target range, IAG instead plans to pay out EUR 700m as a special dividend.

At present, the group's trading at 2 times book value, a more conservative way of valuing intensely cyclical and asset-heavy businesses like airlines. That's around the longer-term average.

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Fourth quarter and full year trading details

Reported revenue rose 6.7% to EUR 24.4bn, with passenger revenue up 6.2% to EUR21.5bn and cargo revenue up 3.6% to EUR 1.2bn. IAG's capacity rose 6.1%, with growth across all brands and regions other than Asia Pacific, which was unchanged year-on-year.

Revenue per available seat kilometre rose 2.4% at constant exchange rates, as yields (a measure of pricing) increased 1.5% and load factor (which indicates how full the average plane was) rose 0.7 percentage points to 83.3.

IAG's adjusted non-fuel unit costs for the year fell 0.8% to EUR 4.89 per available seat kilometre. However, adjusted operating costs rose 6.3% as fuel costs rose 14.6% to EUR 5.3bn.

Net debt rose 7.7% to EUR8.4bn, on account of extra long-term borrowings and capital expenditure to fund the fleet expansion. Adjusted net debt to EBITDAR (earnings before interest, tax, depreciation, amortisation and rental costs) increased from 1.5 to 1.6 times.

Looking ahead, IAG expects revenue per available seat kilometre to improve, but costs looks set to increase despite forecasts for flat non-fuel unit costs. That leads IAG to anticipate 2019 adjusted operating profit to be in line with 2018.

Find out more about IAG shares including how to invest

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.