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A month ago, I was gung-ho for International Consolidated Airlines Group (LSE: IAG) shares. On 7 February, I noted they’d climbed a stunning 145% in a year, making them the best performer on the entire FTSE 100.
I swept aside my usual worry that I was coming too late to the party. I decided the British Airways owner still looked terrific value, with a price-to-earnings (P/E) ratio of just 8.6.
Admittedly, its P/E was below four times at the start of its stellar run, but I decided the airline still had more fuel in the tank.
So what stopped me? The simple fact that my trading account was empty of cash. I had to sell something to buy, and couldn’t decide what.
Can this FTSE 100 stock gain altitude again?
In retrospect, I got lucky. The share price has slumped 10% in the last month, from 363p to 327p. Its P/E’s down to around seven. The shares are still up 130% over 12 months, but have I just been handed a brilliant buying opportunity?
The first thing to say is that one month’s movement is neither here nor there. In the short term, shares can go anywhere. It’s worth paying attention if bad news or bad results have destroyed the investment case, but that isn’t the case here.
The IAG dip’s mostly down to wider stock market volatility as the world adjusts to the Donald Trump presidency.
After the initial ‘Trump bump’ following his November election victory, investors decided that British Airways’ transatlantic travel operations left IAG nicely placed to benefit from the anticipated US boom. Now they’re having a rethink.
Threatened tariffs pose a threat to international trade and travel demand, as well as wider economic and geopolitical stability. Even if Trump’s tariffs don’t directly target the airline industry, they could still hit business travel and consumer confidence. Airlines can be cyclical, booming in good times, struggling in bad.
The uncertainty has cast a shadow over a positive set of 2024 results, published on Friday (28 February). These showed full-year operating profit 49% higher than analyst predictions, at €961m. CEO Luis Gallego felt confident enough to claim during an earnings call that “this is not the peak, but the start of a more sustained level of profits”.
Share buybacks and dividends
IAG also announced a €1bn share buyback while the trailing dividend yield of 2.47% is forecast to hit 2.81% this year. With luck, it will continue to climb.
Let’s not get carried away. The post-Covid rapid recovery stage is over. Operating margins are forecast to creep up very slowly, from 13.3% to 13.5%. Net debt is still around the €6bn mark.
The 26 analysts offering one-year share price forecasts have produced a median target of 387.9p. If correct, that’s an increase of 18.5% from today. So while they’re optimistic, nobody expects the shares to double again. Investors considering this stock need to temper their expectations.
I’m keen to buy but I’m butting my head against the same problem. My trading account is empty. That’s still the only thing stopping me from buying IAG today. Better get saving.
