easyJet (LSE:EZJ) has announced how much it intends to return to shareholders over the next two years. As its stock is part of my long-term portfolio, I’m keen to know how this impacts the dividend forecast.
2023 results
On 12 October 2023, the company published its preliminary results for the year ended 30 September 2023. Once finalised, it expects its accounts to show a profit before tax of £440m-£460m. Due to the pandemic, this is the airline’s first profit since its 2019 financial year.
But dividends are paid out of after-tax earnings. And the company is proposing to return 10% of its profit after tax as a dividend this year, increasing to 20% in 2024.
Assuming corporation tax of 25%, the company will pay its shareholders £33m-£34.5m (4.35p-4.55p a share) in 2023. At the top end of this range, that’s a current yield of 1.2%.
2024 forecast
Little guidance has been given as to how the company will perform in 2024. But the airline has 15% more seats to sell, so I’m going to assume profits will increase by this amount.
There are many factors that could render this prediction inaccurate, the biggest of which is the cost of aviation fuel.
Like most commodities, prices have been slowly rising in recent months. But easyJet has hedged the majority of its requirements over the next 12 months, so it will have some certainty over fuel costs. And it will have adjusted its seat prices accordingly to maintain its margin.
A 15% rise in earnings, and a 20% return to shareholders, would equate to a dividend per share of 10p-10.5p. This implies a current yield of up to 2.7%.
There are many other stocks that currently offer far higher returns.
However, it’s important to remember how the industry was nearly wiped out by Covid. The company had to raise funds to survive and, as a result, there are now another 361m shares in circulation.
easyJet last paid a dividend in November 2019 (43.9p). That cost the company £174m — 50% of its 2019 earnings — so there’s scope to be more generous.
But due to the extra shares in issue, a dividend of £174m would now equate to ‘only’ 23p a share. Although due to a decline in the share price, that would give an impressive yield of 5.8%.
Take off?
The airline appears to be making better progress than most.
The other aviation stock in the FTSE 250, Wizz Air, doesn’t pay a dividend. Neither does the FTSE 100‘s International Consolidated Airlines Group, owner of British Airways.
However, Jet2, listed on the Alternative Investment Market, resumed returning cash to shareholders in February 2023.
Encouragingly, easyJet has set itself a medium-term target of £1bn in pre-tax earnings.
If realised, and the company decided to return to its 50% payout ratio of 2019, the dividend would be 49.5p a share — a current yield of 12.5%!
Before I get too carried away, I’m aware that the directors haven’t specified a date for this goal. And it’s easy to be ambitious, far harder to realise that ambition.
However, before the pandemic, the company had a good track record of growth. It’s also planning to buy another 150 aircraft to help meet the anticipated demand.
I’m therefore hopeful that the target can be realised.
