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Why I’d still buy this FTSE 100 dividend star over Ryanair

Image source: Getty Images.

Shares in budget airline Ryanair (LSE: RYA) were up almost 4% in trading this morning as the company released news of record earnings to the market.

With the shares around 20% off highs reached last August before today, should prospective investors take this as a sign that the recent slump is now over? Like the company’s management, I remain cautious.

Headwinds ahead

First, the good news. The number of people choosing to travel with the airline rose 9% to a little over 130m over the year to the end of March, with the company performing well in markets such as Germany, Spain, and Italy. Its load factor — the percentage that flights are filled — also remained impressive at an average 95%.

All told, revenue moved 8% higher to €7.15bn. Profit after tax rose 10% to €1.45bn with net margin staying at 20%.

These numbers are particularly decent when you consider that they were achieved in the face of rising oil prices, overcapacity in the industry (meaning lower airfares) and in spite of the pilot rostering debacle that resulted in thousands of Ryanair flights being cancelled last September. With regard to the latter, the company stated that it had agreed on new five-year pay deals with most of its pilots but that it also expected the market for such employees to stay “tight” going forward.

Other developments included the launch of Ryanair Sun — the company’s Polish charter airline — and the purchase of a stake in LaudaMotion, with the intention of building a 75% majority holding and eventually relaunching the latter as “Austria’s No.1 low fares airline“.

Despite expecting traffic to increase to 139m in the current financial year however, management’s outlook for 2018/19 was “on the pessimistic side of cautious“. With fuel set to be a “major cost headwind” for the next two years (thanks to growing demand and short-term political issues) and rising staffing costs, Ryanair cut guidance for the current year to somewhere between €1.25bn and €1.35bn. Importantly, the company also stated that this was heavily dependent on multiple factors, including the absence of security events (i.e. terrorist incidents) and “no negative Brexit developments“. 

If I were an investor, that wouldn’t exactly fill me with confidence.

Dividend delight

If forced to make a choice between the two, I’d be far more tempted by British Airways, Iberia, and Aer Lingus operator International Consolidated Airlines  (LSE: IAG).

Recent results from Ryanair’s industry peer have been just as satisfactory, with May’s trading update revealing a 2.1% increase in total revenue to (5.02bn) in the three months to the end of March. Operating profit of €280m before exceptional items was also 75% higher than that achieved over the same quarter in 2017.  

While just as susceptible to higher fuel prices and global events, the £14bn FTSE 100 giant expects to see a year-on-year increase in operating profit in 2018. The massive reduction in debt over the last few years is also positive and should allow the company to continue increasing dividends (a 21% hike is expected this year). Indeed, at a forecast 3.8% compared to Ryanair’s 2.2%, IAG already looks a far better pick for income investors

The shares are also far more keenly priced, changing hands for just 7 times expected earnings compared to Ryanair’s 13. Taking into account the fact that IAG’s success isn’t dependent on winning the budget airline dogfight, that looks a great deal to me.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.