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Should I buy easyJet shares for spectacular dividend growth?

Young Caucasian man making doubtful face at camera
Image source: Getty Images

easyJet (LSE:EZJ) hasn’t paid any dividends since the height of the Covid-19 crisis when it battled for survival. But brokers expect shareholder payouts to return this year as the budget airline moves back into the black.

In fact, City analysts are expecting dividends to grow sharply over the next couple of years. So should I buy the FTSE 100 firm to boost my passive income?

Rapid dividend growth

Forecasters think the business will swing from losses of 19.6p per share in the year to September 2022, to earnings of 20.3p this year. As a result, easyJet is tipped to pay a 7.07p dividend for fiscal 2023.

Earnings are then tipped to almost double to 40.4p per share in financial 2024. And the total dividend is forecast to rise more than 100% year on year to 15.73p.

Based on these forecasts, easyJet’s 2% dividend yield for this year jumps to 4.5% for 2024. And as you can see, current dividend estimates are well covered by anticipated earnings too.

Dividend coverage of two times or above provides a wide margin of safety for investors. easyJet’s predicted dividends are covered between 2.6 times and 2.9 times over the next two years.

On a roll

The airline industry has recovered strongly following the end of Covid-19 lockdowns. Revenues have impressed, even as labour shortages over the summer caused huge disruption for carriers and airports.

In fact, easyJet recorded blowout trading numbers over the summer. It delivered EBITDAR (earnings before interest, taxes, depreciation, amortisation, and restructuring or rent costs) of £674m between July and September. This was a record quarterly result.

Demand for holidays has remained rock-solid as the Covid-19 threat has receded. And trading at easyJet could remain strong, even as economies across Europe tip into recession. Low-cost carriers like these could benefit from holidaymakers and business travellers switching down from more expensive airlines.

Clouds on the horizon?

That said, budget operators aren’t immune to broader economic challenges. If travellers rein in their spending, the turnover easyJet makes from add-ons (in-flight meals and extra luggage) could slump.

The FTSE 100 firm faces other major problems that could stretch beyond 2023 too. A tight labour market means pilot and cabin crew costs might continue to soar. Staff shortages could also mean thousands more flight cancellations.

Airline profit margins are notoriously thin (easyJet’s EBITDAR margin stood at 9.9% last year). They could come under further pressure next year as well if oil prices spike, for example, if extra OPEC+ production cuts come into effect.

The verdict

Today, easyJet’s share price trades on a forward price-to-earnings (P/E) ratio north of 16 times. This isn’t an outrageous valuation. But I don’t think this represents attractive value, given the risks to current forecasts.

Meanwhile, the 2% dividend yield for this year sits well below the 3.7% average for FTSE 100 shares. I’ll be keeping an eye on the recovery at easyJet. But for the time being, I’m happy to buy other dividend-paying stocks.

The post Should I buy easyJet shares for spectacular dividend growth? appeared first on The Motley Fool UK.

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Royston Wild 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.

Motley Fool UK 2023