When looking around the FTSE 100 for income shares, there is a big selection from which to choose. Some FTSE 100 stocks yield over 7% or even 8%. Others pay no dividends.
Currently the FTSE 100 yield is 3.1%. So one FTSE 100 stock with a yield well above that average, at 3.6%, has caught my eye.
Not only is this attractive, but the share sells for less than six times earnings. That seems cheap.
Well-known brand in the aviation sector
That share is airline easyJet (LSE: EZJ).
It needs little introduction, with the carrier having welcomed 93m passengers aboard its brightly coloured aircraft in its most recent financial year.
Some of the wider challenges facing its industry also need little introduction. easyJet was strongly placed before the pandemic, but like rivals it saw passenger demand plummet due to an event outside its control. Now, echoing that, the war in the Middle East is a risk for its profitability.
The risk profile hurts investor enthusiasm
Unlike rivals such as Wizz Air and International Consolidated Airlines Group (IAG)-owned British Airways, easyJet does not fly to the United Arab Emirates.
But its route network includes possible hotspots such as Cyprus and Turkey, both of which have been targeted by drones in recent weeks.
In addition, the business and its rivals could be hit by soaring jet fuel prices. easyJet has hedged prices for 84% of its fuel needs in the first half of its current financial year, meaning those prices are fixed whatever happens in the oil market. But further out, a smaller proportion of its fuel needs have been hedged.
Another risk to the FTSE 100 stock is people flying less, even in regions not directly affected by the war.
That could be triggered by nervousness given the geopolitical situation, or simply because sinking consumer confidence leading to flyers cutting back on discretionary spending like holidays.
Little surprise that since the start of the year, the share price has tumbled 29%.
That is slightly less painful than Wizz Air’s 31% slide in the same period, but around twice as bad as IAG’s 15% fall.
This could be a bargain – but with lots of unknowns
Is that fall justified?
Comparing IAG and easyJet is a bit like comparing apples and oranges. Yes, they both in the airline sector but they operate in different parts of the market across much of their network. IAG has a wider family of brands, as well as a global footprint rather than a primarily European one like easyJet.
Still, easyJet has a proven business model and showed its resilience in the pandemic and subsequent recovery.
The share sells for under six times earnings. Net debt at the end of its most recent quarter was a relatively modest £106m. IAG’s, in sharp contrast, was around £5.1bn.
From a long-term perspective, I think easyJet at its current price is a potential bargain.
Plus the stock offers a dividend yield well above the FTSE 100 average. However, if the war leads to earnings falling, that could be cut or cancelled as happened during the pandemic.
I see the risks here both as significant and hard to quantify right now with a high level of confidence.
There are just too many unknown factors for my risk tolerance, so I will not be investing.
