Airlines haven’t been lucrative income stocks since the Covid-19 crisis. But current dividend forecasts suggest easyJet (LSE:EZJ) shares could be an attractive way to make a passive income in the very near future.
The FTSE 250 company hasn’t paid a dividend since the pandemic grounded its planes. And City analysts aren’t expecting shareholder payouts to return this financial year (which ends this month).
However, the budget airline is tipped to restart its dividend policy in the coming months. And broker estimates suggest payments will return at elevated levels.
For fiscal 2024, the dividend yield on easyJet shares comes in at 4.7%, well ahead of the 3.4% forward average for FTSE 250 shares. And for the following year, the yield improves to 5.7%.
So should I buy this recovery stock for my dividend portfolio?
A large and growing dividend
easyJet has seen a significant improvement in its balance sheet, thanks to self-help measures and, more critically, a sustained rebound in the travel market.
In fact, the company moved to a net cash position of £300m as of June. This marks a huge departure from the peak debt of £1.1bn recorded at the height of the pandemic.
With further progress tipped, the flyer is tipped to pay a full-year dividend of 19.6p per share this year, resulting in that large yield. A big upgrade to 24.2p is tipped for fiscal 2025 as well.
On the face of it easyJet looks in good shape to meet current dividend forecasts too. As well as having that fast-improving balance sheet, predicted payouts for the next two years are covered three times over for the next two fiscal years.
Any reading above two times provides a wide margin of safety for investors.
Should I buy?
easyJet’s recovery has been impressive as passengers have returned in droves and the sale of ancillary services like extra baggage allowances and seat selection have boomed. Between April and June, it swung to a pre-tax profit of £203m from a loss of £114m, as revenues jumped 34% year on year.
Yet I’m not tempted to buy the low-cost company for my portfolio. The cost-of-living crisis is worsening across its European territories. Meanwhile, strong pent-up demand for holidays that was built during the pandemic is inevitably fizzling out. This threatens all airlines as people cut back on luxuries like holidays.
Other large dangers to easyJet’s recovery include:
- An extended rise in fuel costs as signs of tightening oil supply emerge. Brent crude hit 11-month highs of $90 per barrel just this week
- Government plans to review the practice of ‘drip-pricing’ where not all charges are initially revealed to customers. This could significantly impact airlines’ ancillary revenues
- Rapid expansion by rivals including Ryanair, Wizz Air and IAG-owned Vueling. This threatens to keep prices of easyJet’s tickets at low levels
So despite expectations that dividends will return, I’d still rather buy other UK income stocks this September.
