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IAG - dividend suspended

Sophie Lund-Yates, Equity Analyst | 2 April 2020 | A A A
IAG - dividend suspended

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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: 93.00 | Buy: 93.14 | Change -0.60 (-0.63%)
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In response to COVID-19 and related disruption IAG has decided to suspend its final dividend of EUR0.17. It has instead decided to allocate all remaining profit from the 2019 financial year to the group's reserves.

The group has also rescheduled its AGM for September instead of June.

The shares fell 2.8% following the announcement.

View the latest IAG share price and how to deal

Our view

Airlines are a traditionally cyclical industry, and investors will be used to ups and downs. But current conditions are particularly challenging.

Coronavirus has hit airlines hard. Demand for flights has dropped substantially, although this is a bit of a moot point in the face of widespread travel restrictions. We don't know what the eventual damage will be, but we believe it will be significant.

In times like these investors will be thinking hard about the financial strength of the businesses they own. The two key metrics are therefore the amount of money going out the door, and the amount of liquid cash the group has to meet its obligations.

In 2019 IAG's total operating costs were EUR22.2bn before exceptional items, and we make cash costs something in the region of EUR60m a day. Management will try to reduce these costs as much as possible, but we don't know how low they can get them yet. As of 12 March, IAG had EUR7.35bn of cash and cash equivalents on its balance sheet. The desire to preserve as much cash as possible is behind the group's decision to suspended the dividend.

In our opinion, IAG's significant liquidity puts it in a stronger position than some of its peers. The short term earnings hit could be very ugly though, and if the disruption continues long enough even IAG's resources could reach their limit.

We don't know where this will end up, but the risk-reward profile of the airlines has been heightened dramatically by COVID-19. It is possible that some airlines will not make it through this degree of disruption, especially if it continues for an extended period of time. However, those that do make it could see their competitive position strengthened in the end.

Prior to the most recent update, IAG shares changed hands for 0.7 times book value, a more conservative way of valuing cyclical and asset-heavy businesses like airlines. However, it is possible that book value will be written down in the near future, so investors should be careful when using backward looking metrics in such a dynamic environment.

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Trading details (16/03/20)

In response to the disruption and travel restrictions occasioned by the ongoing coronavirus outbreak, IAG plans to reduce capacity by at least 75% during April and May. This follows an expected 7.5% reduction during the first quarter, and comes alongside other cash saving measures.

CEO Willie Walsh is delaying his retirement to lead IAG during the outbreak, and other management changes have also been put on hold.

As well as reducing capacity, IAG is working to reduce operating expenses and preserve cash. Measures include: grounding surplus aircraft, reducing capital spending, cutting non-essential IT spending, freezing recruitment, cutting employee hours, temporarily suspending employment contracts and offering voluntary leave to staff.

IAG said it has EUR7.35bn in cash and equivalents as of 12 March 2020, as well EUR1.9bn of undrawn credit backed by aircraft.

CEO Willie Walsh said the decline in bookings and demand in the wake of the coronavirus outbreak has been "substantial", and demand is expected to remain weak until well into summer.

IAG has not given profit guidance for the year as the final impact of the outbreak is still uncertain.

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.