International Consolidated Airlines Group (LSE:IAG) shares have nearly doubled in value since their post-pandemic low. But the company hasn’t paid a dividend since December 2019. Ongoing losses, loan covenants, and obligations towards its UK legacy pension schemes have restricted the company’s payments to shareholders.
However, during a call with analysts in February, the airline’s chief financial officer, Nicholas Cadbury, said: “… we’ve strong conviction in the free cash flow creation for the Group for this year and beyond. And if this performance is sustained, we look forward to resuming returning excess cash to our shareholders in the near future.”
Looking backwards
International Consolidated’s last annual dividend was 31 euro cents in respect of its 2018 financial year. This cost the company approximately €617m (£529m at current exchange rates). Shareholders also received a special dividend of €700m.
But the airline’s capital structure is very different now.
In December 2020, due to the international travel bans resulting from Covid, the company had to raise €2.75bn to shore up its balance sheet. It now has 2.5 times more shares in issue that it did at the end of 2018.
And those who participated in the rights issue have done well. The shares were offered at a 36% discount to the prevailing market price. They are now worth over twice as much.
However, due to the higher number of shares in circulation, a dividend of €617m would now equate to ‘only’ 12.4 euro cents (10.6p) per share. Although, if repeated in 2024, this would mean the shares are currently yielding a very respectable 6.2%. The average for the FTSE 100 is 3.9%.
But the Group has a large amount of debt on its balance sheet. And higher interest rates means it’s going to cost more to service its borrowings. In 2018, its interest payments were €231m. In 2023, they ballooned to €1.1bn. It has also made certain commitments to the trustees of its group pension schemes that restrict its flexibility in making returns to shareholders.
All this means it needs to be prudent when it comes to managing its cash.
Looking forwards
That’s why analysts are forecasting a dividend of 3.3 euro cents (2.6p) per share in 2024. If correct, this implies a yield of 1.5%. I don’t think this is enough to tempt income investors to buy the stock.
For 2025, the ‘experts’ are predicting 6.1 euro cents (4.8p).
Of course, predicting dividends is a difficult business. And volatile earnings caused by unforeseen events can make forecasters look silly.
I’m also wary when directors talk about ‘returning excess cash’ to shareholders. This is deliberately vague language intended to cover both dividends and share buybacks. Personally, I prefer the former as this gives me cash in my hand.
However, I am expecting the dividend to be reinstated soon. Although it’s highly unlikely to be at the levels previously seen, those who bought a stake in the company when the pandemic cast doubt on its future, will see it as the icing on the cake. It should also help maintain the momentum in the share price, which has increased 17% since March 2023.
As for those hunting generous dividends, I think they are going to have to look elsewhere.
