UK Markets closed

Tempted by the Thomas Cook share price? Here’s what I think you should know

Tom Rodgers
An airplane on a runway

It must be an odd feeling to glance at your portfolio and see the Thomas Cook (LSE:TCG) share price doing well.

Optimistic acquisitions throughout the 2010s saw the group balloon in size as the business was loaded up with massive debts but since 2018, it has lost 90% of its value. So it must be a bargain now, right?

Excited chatter of a £750m rescue deal for its flight operations via its biggest shareholder, Chinese investment group Fosun, plus the short-term woes of rival British Airways, led to a huge recent uptick in the share price.

After flat performance throughout July, Thomas Cook shares initially shot up on news of pilots’ union BALPA threatening strike action at Heathrow airport. This industrial action, which would ground British Airways planes, might still go ahead on 23 and 24 August. And BA has not come out of the situation well after repeated wrangles over pilots’ pay. The union’s general secretary Brian Strutton has said: “BA’s attempt to defeat the democratic view of their pilots in court, rather than deal with us across the negotiating table, has sadly wasted huge amounts of time and money.”

Any competitor’s failings represent an opportunity for Thomas Cook, but are its shares a bargain or a fire sale?

Dividend? Nope

According to the latest figures, Thomas Cook’s dividend yield is up to 7.4%. I’d be very wary of expecting anything from the travel operator, though.

Repeated profit warnings saw Thomas Cook scrap its dividend in 2018. It had paid no dividend in 2014 or 2015, and despite cover of over 15 times earnings, paid only a 0.7% yield in 2016, and 0.5% in 2017.

This isn’t a stock for income investors. That much should be clear.

Chief executive Peter Fankhauser noted how 2018 had been “a disappointing year” as underlying earnings missed expectations by £30m and dropped £58m year-on-year.

Net debt hit 41% of revenues in the first half of 2019, putting immense pressure on operations and working capital. Only a £300m rescue loan in May stopped the business going under for good. I would avoid it.

Fly me to the moon

If you still want exposure to travel shares in your portfolio, it’s somewhat ironic that you could do worse than the aforementioned British Airways. Well, its owner anyway, FTSE 100 share International Consolidated Airlines Group (LSE: IAG).

For one, the Willie Walsh-headed giant has less exposure to European short-haul flights than rivals Ryanair and Lufthansa that issued their own profit warnings last year.

IAG has also paid reasonably reliable dividends of between 3% and 4.9% since 2015. Dividends have been well covered by earnings, with a ratio that hasn’t dropped below 3.7.

A net gearing of 9.2% is low for travel operators, the industry having an awful lot of machinery and infrastructure to support.

So what headwinds does the business face? UK airlines are embroiled in an ongoing battle for passengers so ticket prices have been depressed (although Walsh has predicted fares will rise later this year). The chief executive disposed of £7m-worth of shares in May 2019, which may be cause for concern. And IAG’s current P/E ratio is exceptionally low at 3.97, which would suggest that analysts are nervous that growth will not materialise. Still, the average of future earnings per share estimates puts IAG at a forward P/E of about 4, which looks like good value, and despite the uncertainty, it may well be worth a shot.

More reading

Tom holds no position in any 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 2019