The travel sector has recovered impressively following the end of Covid-19 lockdowns. But legacy and pension scheme issues mean that International Consolidated Airlines (LSE:IAG) shares are yet to begin paying dividends again.
However, City brokers believe this may all be about to change. The British Airways owner isn’t tipped to recommence paying dividends in 2023, but shareholder payouts are expected to return next year and to grow rapidly thereafter.
But how reliable are current dividend forecasts? And should I buy IAG shares for my portfolio today?
Rapid dividend growth
There’s been a buzz around returning dividends at the aviation giant since December. Back then, it signed an agreement with the trustee of its New Airways Pension Scheme (NAPS) that could see it recommence shareholder payouts shortly.
Some of the terms IAG must meet include:
- An agreement not to pay dividends in 2022 and 2023
- A requirement that the firm contributes to the scheme should the funding ratio fall below 100%
- If a dividend is paid in 2024, a 50% matching contribution must be paid to NAPS
- Dividends will be capped at 50% of pre-exceptional profit in 2025, with payments above this level requiring additional NAPS contributions if the scheme is not 100% funded
- British Airways keeps a minimum cash level of £1.6bn after any dividends and matching contributions are paid
Such hoops won’t be easy for the FTSE 100 firm to jump through. But forecasters expect IAG to meet these criteria.
The airline operator is tipped to get things rolling again with a full-year dividend of 2.1 euro cents a share in 2024. This results in a 1.2% dividend yield.
And for 2025, the yield marches to 2.6% on expectations that payouts will leap to 4.5 cents.
City earnings projections suggest IAG will be in good shape to meet these dividend forecasts too. Earnings per share are put at around 34 cents and 38 cents for 2024 and 2025 respectively, estimates that provide an enormous margin of safety.
Should I buy?
Having said all of that, I’m not tempted to buy IAG shares for dividend income just yet.
The firm has continued to impress as pent-up travel demand built during the pandemic powers passenger numbers. Operating profit hit record levels of €1.3bn in the first half as capacity hit 94% of 2019 levels.
But the company faces significant obstacles that could hit its earnings and balance sheet recovery, and see it fall short of those NAPS requirements.
Enduring inflationary pressures and patchy economic recovery cast long shadows over plane ticket demand moving into 2024. IAG’s rebound is also in danger as fuel prices march towards $100 per barrel, while other rising costs and foreign exchange fluctuations pose another threat.
Fresh industrial action by airport staff is another potential barrier to dividends returning next year. Just next month, baggage staff at Heathrow are scheduled to strike for 13 days.
The prospect of strong dividend growth in the coming years is highly tempting. But for the moment I’ll continue to buy other FTSE 100 shares for passive income.
