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magazineIs IAG putting dividend at risk with Norwegian Air pursuit?
Investors attracted to British Airways-owner International Consolidated Airlines (IAG) for its near-5% dividend yield could face a dividend cut if its acquisition of Norwegian Air goes through.
Analysis by investment bank Citi says the ratio of free cash flow compared to the dividend would fall from approximately 2.3-times to below 1.0 times if a takeover occurred. A free cash flow-to-dividend ratio of less than one would, if the dividend is maintained, imply debt is being used to prop up payments.
International Consolidated Airlines has a history of steady dividend growth over recent years so any cut in the payout may come as a nasty surprise and could put the shares under pressure.
In 2018, the airline was rebuffed twice by Norwegian, but could return with another bid. If it cannot acquire Norwegian, the company says it will sell its stake of 4%. As we write it is yet to offload the shares.
Norwegian sells competitively priced seats on long-haul routes, which could help International Consolidated Airlines offer cheaper fares, particularly to the US.
The takeover attempts have been branded as opportunistic and undervaluing Norwegian, which reportedly faces bid interest from other rivals, including German carrier Lufthansa.
While International Consolidated Airlines is in reasonably robust shape, loss-making Norwegian is not. It is struggling with sector-wide issues such as Brexit, volatile oil prices and spiralling costs, which have pushed the business further into the red.
IS THE DIVIDEND CURRENTLY SAFE?
On a free cash flow basis, International Consolidated Airlines currently looks to have the dividend reasonably well covered. Free cash flow is vital to look at as it focuses purely on leftover cash after money has been factored in for operational needs.
According to analysts’ data from Refinitiv, free cash flow in 2017 of around €2bn easily covered a total outlay on dividends of €512m payout in the year to 31 December 2017.
While free cash flow is forecast to nearly halve to €1.23bn in 2018, this still comfortably covers an estimated €558.1m to be paid out in dividends in 2018.
Looking ahead to 2019 and 2020, free cash flow is forecast to remain steady at €1.2bn while annual dividends are forecast to increase to €624m.
International Consolidated Airlines is scheduled to report its 2018 results on 28 February 2019.
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