UK-based package holiday and leisure flights provider Jet2 (LSE: JET2) delivered a strong set of full-year results this morning (11 July) and the shares are responding well.
The icing on the cake is the directors’ decision to push up the final shareholder dividend for the year by a whopping 34%.
This business has been growing
However, I’m not getting all excited about the immediate income potential. After all, with the stock near 1,348p, the forward-looking dividend yield for the current trading year to March 2025 is just over 1%. That’s not much.
But company directors’ decisions about dividends can be useful indicators about how well a business is doing and the strength of its outlook.
In this case, the message is positive. Jet2’s record on shareholder payments has been improving fast after the deep hole gouged by the pandemic.
In fact, it’s hard to find any negatives in today’s report. For example, revenue rose by 24% year on year for the 12 months to 31 March, and earnings shot up by 37%.
Not only has Jet2 recovered its pre-pandemic levels, revenue, earnings, and other indicators have all far exceeded them. From such financial outcomes, it’s hard to ignore the way the enterprise has been growing — and fast.
It seems clear the business has been winning market share with its holiday offering. Meanwhile, the news flow over months and years speaks of a business expanding and growing at pace.
A positive outlook
Since the depths of the spring 2020 sell-off, the share price has been following the improving fundamentals of the business, albeit with some sloth:
The big question, though, is what does the future hold and can the business keep growing?
City analysts following the firm expect revenue to grow by about 14% in the current trading year. That’s growth all right, but it looks set to produce just a modest increase in earnings of about 3%.
I’m relaxed about that, though. With most businesses, they must invest to expand first and profits come later. Cash flow will likely be strong because the company expects to increase the dividend by about 12%.
Meanwhile, the balance sheet looks robust, with a big pile of net cash rather than net debt. That’s a massive tick for me, because one of the biggest ongoing risks with this one is the often-horrendous cyclicality in the leisure and airline industries.
We only need look at the devastation the pandemic caused the business to see how bad things can get. Many things can affect the business, such as rising fuel prices, economic downturns, war, pestilence, plague, volcano eruptions, and so forth.
Nevertheless, the forward-looking earnings multiple for the current year is running just below eight. I don’t think that’s an excessive valuation.
On balance, and despite the risks, I’m attracted to Jet2 for its growth prospects. So I’m keen to dive in with deeper research now with a view to considering the stock for a long-term hold.
