Cast your mind back three years. The pandemic in China was starting to hit the news, but there were few signs of the coming storm for airlines like easyjet (LSE: EZJ). So, what would have happened if I bought easyjet shares for my portfolio back then?
Value destruction
The answer is that, even now, I would be nursing a big paper loss.
The shares are still 60% lower than they were three years ago. So my £500 investment would be worth just £200. That is a big loss.
Since then, things have been mixed for the airline industry. Lately, though, passengers and investor enthusiasm have returned in spades. Indeed, over the past year alone, easyjet shares have risen 53%.
If I had bought them a year ago that would be music to my ears. But if I had invested back in February 2020, I would still see be suffering from significant value destruction over the course of my holding.
Dividend drought
Before the pandemic, easyjet was a popular income pick for many investors. Indeed, its strong dividends could have been one of the things that attracted me to it back in February 2020.
At the end of 2019, the company had proposed a dividend per share of 44p (around 8.7% of today’s easyjet share price). When dividends are declared, there is an ex-dividend date and a payment date. In that case, the ex-dividend date was 28 February 2020. So, buying the shares three years ago, I would have been in time to qualify for the payout.
The payment date was set at 20 March. Four days before that, the company updated the market on the rapidly evolving pandemic. It reminded shareholders that “easyJet maintains a strong balance sheet including a £1.6bn cash balance, an undrawn $500m Revolving Credit Facility (and) unencumbered aircraft worth in excess of £4bn”. Before the month was out, easyjet grounded its entire fleet.
But, unlike some companies at the time, it did not cancel the declared dividend. So the 39 shares my £500 would have bought me three years ago would have paid me around £17 in dividends.
If I still held them now, I would be entitled to any dividends should the airline decide to restart them in future.
Looking forward
If I had bought the shares then, would I still own them, hoping for share price recovery and the resumption of dividends?
I do not know. One common mistake among investors is trying to recover sunk costs by holding a share for years, hoping blindly for price recovery.
In the case of easyjet, though, that might yet come. Passenger numbers are recovering strongly and I expect ongoing robust demand. But the business remains loss-making. The headline loss before tax in the most recent quarter was £133m. That once solid balance sheet now groans with £1.1bn of net debt.
So despite the potential upside from its strong market position and lean cost base, I would not buy easyjet shares for my portfolio now. I am very glad I did not buy them three years ago either!
