IAG share price analysis: dividend is good, but risks remain

The International Consolidated Airline (LON: IAG) share price has held steady well this month as concerns about the industry remains. The stock was hovering at 165p on Tuesday, where it has been stuck at in the past few weeks. This price is about 85% above its lowest point in 2023.

Airline industry is softening

There are signs that the airline industry is softening and going through substantial headwinds this year. The low-hanging fruit in the sector is the ongoing delivery challenges by Airbus and Boeing, the two biggest players in the sector. 

In its most recent results, Airbus said that its deliveries rose to 323 in the first half of the year as its order backlog rose to 8,385. The company noted that it was still facing supply chain challenges that are affecting its supply. 

Boeing’s deliveries have also been under pressure as the company addresses measures to solve its past issues. 

At the same time, airlines are having to deal with soft demand, high competition, and low airfares. Therefore, most airlines have published weak financial results. Ryanair, the biggest European airline, published weak financial results as its profits dropped by 465 in the second quarter. 

Other airlines like Delta, United, American, and EasyJet have published weak results as well as concerns that the revenge travel boom is ending. They are also paying their workers more money even as fares drop.

IAG is doing better

IAG, the parent company of Iberia and British Airways, is doing better than most airlines because of its Transatlantic growth and the return of business travel. Its revenue rose from €13.5 billion in the first half of 2023 to over €14.7 billion this year as demand in its markets rose. 

The company has also boosted its profitability. Its operating profit rose from €1.26 billion to over €1.3 billion while its profit after tax retreated slightly to €905 million. 

Most importantly, IAG has boosted its balance sheet to include over €9.6 billion in cash and short-term investments, a big increase from €6.8 billion a year earlier. While the company still has a €16.1 billion in debt, the cash is substantial for a firm with a market cap of over £6 billion. It has also achieved investment grade ratings by Moody’s and S&P. 

As a result, IAG has now resumed paying dividends, which is a positive sign for investors who have not received a payout for years. 

Another development is that the company abandoned its plan to acquire Air Europa, a leading Spanish airline after European authorities expressed concerns about its impact. IAG could channel some of those €400 million to boost its balance sheet and pay a dividend.

Risks and opportunities

Investing in IAG has some risks and opportunities that you need to know. The first opportunity is that the company seems like a bargain. As noted, it has over €9 billion in cash, a market cap of £6 billion, and €16.1 billion in borrowings. Its strong credit rating means that IAG is trading at a bargain since its net debt is just €8 billion. 

Second, IAG is a strong brand, especially among business travelers. After having a slow recovery post-pandemic, there are signs that the industry is now doing well as the concept of virtual work and deal fade. 

Still, the company faces significant challenges ahead. The biggest issue is that IAG is operating in an industry whose recovery is stalling as evidenced by the recent corporate earnings. 

Second, the company is facing substantial competition in the industry. Most of this competition is coming from traditional European and American brands like Delta, KLM, and Virgin Atlantic. It is also competing with Middle Eastern companies like Etihad, Qatar, and Emirates. 

For example, a look at most Online Travel Agencies (OTA) for a flight from London to New York brings airlines like Virgin and American that are relatively cheap. A round trip by Virgin costs $1,169 while a look at British Airways puts the round trip at £1,827.

Additionally, the company will be forced to pay higher wages across its brands after recent strikes by workers at Aer Lingus and Iberia.

IAG share price forecast

IAG chart by TradingView

Turning to the weekly chart, we see that the IAG stock price has risen gradually in the past few months. This rebound has seen it rise from 90p in 2022 to 164p. The stock is now consolidating at the 50-week and 100-week Exponential Moving Averages (EMA).

It has also moved slightly below the 23.6% Fibonacci Retracement point. Most recently, the stock has formed a hammer pattern. In price action analysis, a hammer is one of the most popular bullish signs. 

Therefore, the IAG share price will likely remain in this range for a while. More upside will be confirmed if the stock rises above the upper channel at 186.5p while a drop below the lower side of the hammer at 133p will point to more downside.