Should I buy IAG shares if the price drops below £1?

IAG shares continue to slide. As it approaches penny stock levels, should I buy its shares if it falls below £1?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Bearded man writing on notepad in front of computer

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The decline won’t seem to stop for IAG (LSE: IAG) shares. With the share price sliding to a one-year low, I might be tempted to see it as a buying opportunity. Nonetheless, given the state of its finances, I know it would be a high-risk, high-reward investment.

Terminal situation

IAG shares aren’t just trading at its one-year low. It’s also close to its five-year low of £0.91. What started off as a baggage system error last month has now evolved into something much worse. This is because staff shortages at airports have led to massive travel disruptions for British Airways, the biggest airline at IAG.

The airline had initially cancelled 650 flights in July, impacting over a 100,000 passengers. But to make matters worse, Britain’s biggest airline said today that another 10,3000 short-haul flights will be axed until the end of October. This is in part due to British Airways staff striking during the busiest period for the airline. Most of its check-in staff had received a 10% pay cut during the pandemic, but are yet to get their compensation fully reinstated.

This isn’t good news for IAG as it gets squeezed from both sides. Mass flight cancellations could result in the group falling short of its top line guidance. On the other hand, bigger paycheques to check-in staff will squeeze its bottom line even further.

The easy way out?

Sky-high inflation is starting take a toll on consumers’ wallets. Additionally, the Bank of England expects inflation to peak at 11% later this year. As such, consumers’ discretionary spending is expected to decline. Given that fares from airlines at IAG don’t exactly scream bargain, customers are more likely to turn towards budget airlines such as easyJet and Wizz Air. While its competitors also face a similar number of cancellations, they offer cheaper fares on average. This brings better value proposition to customers.

Delays expected for IAG

When IAG unveiled its Q1 results, it mentioned its aspirations to achieve operating profitability by Q2. However, given the current state of affairs, I view this to be highly unlikely. And even if it does manage to achieve such a feat, I don’t expect it to last for the rest of the year. Therefore, I anticipate delays on its route back to profitability.

More worryingly though, IAG has a mountain of debt (€19.6bn) to deal with. It doesn’t help either when its debt isn’t covered by its current operating cash flow nor its cash and equivalents (€7.9bn). If the FTSE 100 firm can’t deliver on its repayments, it’ll have to risk refinancing its debt, making repayments more expensive. This will likely sour investor sentiment further.

IAG shares are a in precarious position at the moment. There doesn’t seem to be light at the end of the tunnel and its balance sheet is in tatters. Moreover, its share price seems to be only going in one direction for the time being. Nevertheless, a report from Bloomberg stated that British Airways is nearing a deal with unions, which could mitigate staffing shortages and turn the airline’s fortunes around. That being said, I still won’t be buying IAG shares for my portfolio as I view it as too high of a risk. Instead, I’ll be investing in other companies that have better fundamentals.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

John Choong has no position in any of the 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.

More on Investing Articles

Young Caucasian woman with pink her studying from her laptop screen
Investing Articles

I’m not convinced the Dr Martens share price is a bargain. Here’s why

After the bootmaker reported its full year results today, our writer explains why a Dr Martens share price in pennies…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Should I invest in the S&P 500 or FTSE 100?

Ben McPoland thinks one FTSE 100 stock might offer a compromise between high US market growth and cheap Footsie valuations.

Read more »

Young Caucasian woman with pink her studying from her laptop screen
Investing Articles

How much passive income could I earn by investing £100 a month in UK shares?

With just a £100 monthly investment in UK dividend shares, I could achieve a decent passive income stream of over…

Read more »

Young Woman Drives Car With Dog in Back Seat
Investing Articles

Looking for cheap growth shares? Here’s a FTSE 250 stock to consider in June

Pets at Home shares still look dirt cheap, says Royston Wild. Here, he explains why the retailer might be one…

Read more »

Number three written on white chat bubble on blue background
Investing Articles

The 3 big risks to Lloyds’ share price in 2024!

Is the Lloyds share price one of the FTSE 100's worst investor traps? Royston Wild thinks the bank's shares could…

Read more »

Investing Articles

Up 14% in 2024, what’s next for the Lloyds share price?

This Fool takes a closer look at what prompted the Lloyds share price to rise this year, and offers her…

Read more »

Investing Articles

5 FTSE 100 stocks to consider for a lifetime of passive income

I see lots of cheap dividend stocks in the FTSE 100 right now, but prices are starting to rise. Here's…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

3 growth stocks I’m desperate to buy as the FTSE 100 dips

Never waste a dip, says Harvey Jones. Three of his favourite growth stocks have fallen over the last month and…

Read more »