The FTSE 100 is full of blue-chip dividend stocks. Some of these income plays have better fundamentals than others. Today, I’m looking at one dividend champion that I think could be the best income investment in the index.
The airline industry has a pretty terrible reputation among investors. The industry is fiercely competitive and tight profit margins are at the mercy of fare wars and oil prices. Richard Branson once summed up the airline sector’s investment potential: “If you want to be a Millionaire, start with a billion dollars and launch a new airline.“
However, in an industry that has always struggled for profit, easyJet (LSE: EZJ) stands out. Over the past 18 years, the company has proven all its doubters wrong. And since going public at the end of 2000, the airline has generated enormous returns for investors.
Including dividends and capital gains, over the past 15 years shares in the company have returned 13.6% per annum, turning £10,000 into £76,000.
The company has been able to succeed where so many others have failed, thanks to its low-cost, no-frills offer. It has also expanded slowly into new markets while safeguarding the balance sheet from additional debt. At the end of the last reported period, easyJet had a net cash balance of £665m, which is one of the strongest balance sheets in the aviation sector.
And even though easyJet’s revenue has grown by around a quarter to £5bn over the past five years, the airline is still expanding. Back in July, management told investors that the company expects to report profits of between £550m and £590m for 2018, rather than the £530m to £580m initially predicted.
Some analysts have been concerned that rising oil prices would hit the group, but it seems as increasing passenger demand has more than offset higher costs. Last week’s passenger update for August showed a 5.6% increase in numbers carried, with the load factor rising to 93.6% from 92.3% last year.
Based on management’s profit guidance, City experts believe the company will earn 117p per share for 2018, up 51% year-on-year. Analysts expect growth to continue in 2019 and are forecasting earnings per share (EPS) of 139p for the year. Today, you can buy this explosive earnings growth for just 12.9 times forward earnings — in my mind, that’s a steal.
EasyJet’s growth is impressive, but what attracts me to the business is its dividend history. The company has paid out hundreds of millions of pounds to investors via dividends over the past five years. Its cash balance gives it the flexibility to maintain this payout policy as well as investing in operations. At the current level, the distribution of 55p per share is covered 2.1 times by EPS.
The company can easily afford to return more to investors if management decides to slow down the expansion of the carrier’s fleet.
For the past six years, dividend growth has averaged 11% per annum, which I would be thrilled with as an investor. Coupled with easyJet’s earnings growth, this makes for a powerful combination. Based on current forecasts, the shares yield 3.6%.
In conclusion, I reckon easyJet’s dividend credentials and growth outlook make it one of the best, if not the best dividend stock in the FTSE 100.
Do you want to retire early and give up the rat race to enjoy the rest of your life? Of course you do, and to help you accomplish this goal, the Motley Fool has put together this free report titled "The Foolish Guide To Financial Independence", which is packed full of wealth-creating tips as well as ideas for your money.
The report is entirely free and available for download today, so if you're interested in exiting the rat race and achieving financial independence, click here to download the report. What have you got to lose?
Rupert Hargreaves owns no share 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.