Image source: Getty Images
Shares of International Consolidated Airlines Group (LSE:IAG), or IAG as it’s known, have really outperformed over the past couple of years. Of course, they were coming from a depressed position. Aviation stocks were naturally beaten down during the pandemic and then Russia’s invasion of Ukraine caused more pain — pushing up fuel prices and closing some of the world’s most useful airspace.
But what about £10,000 invested a decade ago? Well, sadly the investment would be pretty flat. The stock is almost exactly the same price as it was 10 years ago. Lots of movement in between — and the shares have rarely been higher — but the same endpoint.
There would have been dividends too, but not a massive amount. The yield averaged around 3.5%-4% before the pandemic, but no payments were made between 2020 and 2023. As such, I believe investors would have received a little over £2,000 as dividends during the period.
Yes, the figure would be a little different if dividends were reinvested, but the total return here is only a little over 2% a year. That’s really not very good at all. In fact, I could have beaten that with most government bonds.
Why have we seen IAG surge in recent years?
Ok, so what’s behind the recovery? Well, there are simple things such as the end of the pandemic, robust demand for air travel, and falling fuel prices. Those are the core reasons behind the shift.
But there has also been a re-rating. In other words, investors now seem more content to pay a higher price for each pound earned by the company than they were a year ago. That simply reflects hopes for a sustained recovery in the industry.
Currently, the shares are trading around 6.7 times forward earnings. To put that into context, last November I wrote that the shares were trading at 5.6 times forward earnings — this is a significant shift. And let’s remember, the shares were already pushing up by then. The price-to-earnings (P/E) multiple had been a lot lower.
Reaching fair value
Currently, IAG is trading around 10% below its average share price target. That’s the price that analysts — taking the average — believe represents fair value for the company. This doesn’t represent a huge margin of safety compared to historic levels.
IAG isn’t expensive. That’s for sure, but it’s a little more expensive than some of its peers. Notably Jet2, which although it trades with a higher P/E, has a net cash position that represents more than half of its market cap.
I’m also a little concerned by IAG’s net debt position. This could be a drag on earnings throughout the medium term. It currently sits around £6bn, but is forecast to roughly halve in the coming years. Nonetheless, it could be an even bigger concern if the industry is hit by an external challenge.
Personally, I like IAG, but elected to put my sector investments into Jet2. I still believe IAG is worth considering, but my preference is certainly for the AIM-listed package holiday giant.
This story originally appeared on Motley Fool
