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International Consolidated Airlines (LSE:IAG) has not paid a dividend on its shares since before the pandemic. However, City analysts think that all this is about to change.
Not only do they expect the travel giant to return dividends this year. They predict that cash rewards will grow exponentially over the next three years:
| A year | Dividends per share | Dividend growth | Return yield |
|---|---|---|---|
| 2024 | 6.20p | N/A | 2.9% |
| 2025 | 8.44p | 36% | 3.3% |
| 2026 | 9.15p | 8% | 3.6% |
These bright figures reflect IAG’s impressive balance sheet repair. They also emphasize the expectation that profits will continue to rise during this period.
However, the benefits have never been proven. And the FTSE 100 the company may face growing headwinds as we enter the new year.
So how realistic are current pay rates? And should I buy IAG shares for my portfolio?
Strong predictions
The first, and easiest, thing to consider is how the estimated dividends are combined with the projected earnings. As an investor, I want to multiply by two or more times, which gives a wider margin of safety.
Thankfully, the company scores well on this metric. The dividend payout ratio is a mammoth 6.9 times this year. And while it fell after that, it remains at a staggering 5.2 times and 5 times in 2025 and 2026.
So far so good. But how stable are the financial fundamentals of the British Airways owner?
Well International Consolidated still has a good amount of debt on its books. As of September, total debt stands at €6.2bn. But as I said, the work to improve the balance has been monumental.
Net debt is down significantly from €9.2bn at the start of 2024. As a result, the net-debt-to-EBITDA ratio fell to 1.7 times during that period.
Signing its improved financial health, the company announced a share buyback plan of 350 million euros and a trading update for the third quarter of November.
Is it shopping?
On balance, International Consolidated currently looks well positioned to meet these payout forecasts. But does this mean I should buy its shares today?
Aside from the benefits, I can see other reasons why the entertainment giant is attractive to investors today.
With British Airways, it has one of the strongest airlines on its books, and gives it good exposure to the lucrative transatlantic market. It also has exposure to the fast-growing budget sector through Vueling and Aer Lingus.
Ultimately, its shares look cheap despite rising nearly 70% over the past year. They trade at a forward price-to-earnings (P/E) ratio of 6.1 times.
However other than this, I hesitate to add stocks to my portfolio. The economic outlook for 2025 is far from strong, given signs of stubborn inflationary pressures that could limit interest rate cuts. Potential US trade tariffs, coupled with continued weakness in China’s economy, present other threats.
This is especially worrying for airlines, given that holiday spending is one of the first things to be cut in tough times.
There are other factors that make me uncomfortable with aircraft stock. Fluctuating fuel prices, national events affecting airline routes, industrial disputes, and regulatory changes are evergreen threats that can have a significant impact on revenues and profits.
Investing in any stock involves risk. But right now, the risks associated with IAG shares are too high for me to like.
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