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Should I Invest In easyJet Plc?

To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value

If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.

So this series aims to identify appealing FTSE 100 investment opportunities and today I’m looking at easyJet (LSE: EZJ), the airline.

With the shares at 1,277p, easyJet’s market cap. is £5,059 million.

This table summarises the firm’s recent financial record:

Year to September 2008 2009 2010 2011 2012
Revenue (£m) 2,363 2,667 2,973 3,452 3,854
Net cash from operations (£m) 296 135 363 424 261
Adjusted earnings per share 19.8p 16.9p 28.4p 52.5p 62.5p
Dividend per share 0p 0p 0p 10.5p 21.5p

Economic turbulence shows in the table of results, particularly during 2009 when earnings and cash flow took a dive at easyJet. Since then, the firm has been winning market share in Europe and turnover has whizzed past pre-credit-crunch highs. In recent years, easyJet investors have enjoyed a soaring share price and climbing dividend payments. Right now, the forward dividend yield is about 2.7% for 2014.

The CEO reckons easyJet is a structural winner in the European short-haul market against both legacy and low cost competition, putting market share-gaining success down to the strength of the firm’s business model and the hard work of the team. Indeed, low-cost, no frills travel has caught on in Europe and, in these austere times, as long as easyJet continues to execute well, I think demand for the firm’s offering is likely to continue to grow as economic recovery rolls on.

Having said that, the valuation here doesn’t scream ‘bargain’ to me and, as with any cyclical business, I’m mindful that P/E multiples can compress as the economic cycle plays out. That’s why I’m a little cautious on easyJet’s total-return potential from here, although there’s no denying that the firm is growing.

easyJet’s total-return potential

Let’s examine five indicators to help judge the quality of the company’s total-return potential:

1. Dividend cover: adjusted earnings covered last year’s dividend almost three times.  4/5

2. Borrowings: at the last count, there was net cash on the balance sheet. 5/5     

3. Growth: revenue and earnings have grown with cash flow looking bumpy.  3/5

4. Price to earnings: a forward 12 seems to fly close to growth and yield expectations. 3/5

5. Outlook: good recent trading and an optimistic outlook.  4/5

Overall, I score easyJet 19 out of 25, which encourages me to believe the firm has potential to out-pace the wider market’s total return, going forward.

Foolish Summary

Dividend cover is good and the firm’s net cash position is reassuring. Cash flow seems a little bumpy to me and the P/E rating is up with events. It’s hard to fault recent trading results, and the directors seem positive on the outlook.

A better dividend payout would make me more confident about investing in easyJet, which leads me to consider an idea from the Motley Fool's top value investor, who has discovered what he believes is an excellent income-generating share. He sets out his three-point investing thesis in a report called "The Motley Fool's Top Income Share", which I recommend you download now.

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> Kevin does not own shares in easyJet.