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Growth and income, this stock has it all

Image: Tui. Fair use

Shares in tourism group Tui AG (LSE: TUI) are sliding this morning after the company reported a loss for the first half of its trading year.

At the end of the company’s second fiscal quarter (March), it made an underlying earnings before interest, tax and amortisation loss of €193.3m compared with €206.4m the year before, while revenue rose from €6.2bn to €6.7bn.

Even though these results might seem disappointing at first glance, they’re relatively attractive considering Tui’s earnings are usually weighted towards its second half. Tourism is a highly seasonal business, and Tui usually makes enough over the summer months to be able to keep the business ticking over during the quieter winter period.

Indeed, for the full year analysts are expecting the company to report a pre-tax profit of £790m on revenues of £15.2bn. Earnings per share of 88.8p are expected for the period, up 3% year-on-year.

However, for the 12 months ending 30 September 2018, analysts are expecting an even better performance from the company.

Better times ahead?

One-off events such as European terrorist attacks, Brexit, European elections and Tui’s merger have weighed on income this year but analysts believe earnings will recover as the impact of these events dissipates. Specifically, after growing 3%, this year, City analysts have pencilled-in earnings per share growth of 13% for the fiscal year ending 30 September 2018. Based on these projections, shares in the company are currently trading at a 2018 earnings multiple of 10.9.

This valuation seems attractive, especially when you take into account Tui’s earnings growth and income potential. Earnings growth of 13% on a forward earnings multiple of 10.9 implies a PEG ratio of 0.9 — a PEG ratio of less than one signals that the shares offer growth at a reasonable price. At the same time, shares in the firm support a dividend yield of just under 5%. Analysts expect the payout to increase by around 10% per annum. Based on this projection, next year the shares will offer a dividend yield of 5.3%.

Trends favour growth

If Tui hits City forecasts for growth by 2018, the company will have raised pre-tax profit by around 100% in four years, a highly impressive accomplishment. And it looks as if management expects this growth to continue with a booming Asian tourism market and trend among consumers to spend on experiences, not product. This trend shows in today’s figures with management reporting alongside the results that customer numbers are up 4% year-on-year. Lower demand for regions such as Turkey and Egypt have been offset by greater demand for Greece, Spain, Cape Verde, Cyprus and long-haul destinations such as the Caribbean.

Tui has uniquely positioned itself to take advantage of the rising demand for travel experiences by investing in multichannel offerings and focusing on customer satisfaction. The company offers unique travel experiences and has recorded a customer satisfaction rating of nearly 80%.

So overall, if you’re looking for a business that has all the hallmarks of a long-term growth and income champion, Tui appears to tick all the boxes.

Finding the market's best stocks

Tui has it all, including growth and income, which is rare. Most companies have only one or the other as income is often reinvested for growth, not distributed to shareholders.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.