Dividends had fallen out of favour until recently. Technology companies tended to look down on them because they saw them as a sign that a company’s growth had peaked, while boards increasingly preferred to return money to shareholders through buybacks. During the pandemic many cash-strapped firms stopped paying dividends altogether, arguing that the need to conserve cash amid the economic uncertainty was more important.
However, they are still an important symbol that a company is doing well enough to generate cash consistently – something particularly important as investors can now get a decent return from a savings account. So, when a company that has stopped paying its dividends starts doing so again, it pays to take note.
One company that recently announced the resumption of its payout was the budget airline easyJet (LSE: EZJ). Like most carriers, it has struggled over the past few years, with the collapse in travel thanks to Covid leading to large losses in 2020 and 2021, followed by a much smaller loss last year. It also had to endure the embarrassment of a potential legal battle with its founder Stelios Haji-Ioannou, who threatened to sue the company after it decided not to cancel completely a large order of planes that it made just before lockdown (the two sides later came to an agreement).
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The good news is that the future looks much rosier, vindicating the decision to buy more planes. Despite fears that the cost-of-living crisis would prompt customers to cut back on travel, easyJet enjoyed a strong performance this summer and managed to use its dominant market position to pass on the increased fuel costs to customers in the form of increased ticket prices. In fact, easyJet is now so positive that a few weeks ago it decided to expand its fleet further, unveiling a deal with Airbus that will see it buy an additional 157 planes for delivery from 2029, with the option to add a further 100.
EasyJet full-year results
This week shares in EasyJet rose by almost 4% after it produced an annual profit, thanks to a jump in demand for travel, says Leke Oso Alabi in the Financial Times. With revenue up by 42% to £8.2bn in the 12 months of September, the company made a pre-tax profit of £455m, compared with a loss of £178m in 2022. While warning that early winter results for its 2024 fiscal year would be affected by geopolitical events, it thinks bookings have “started to come back quite significantly”.
Early data seems to support EasyJet’s conviction that “households will continue to prioritise travel in the new financial year”, though this could quickly change if the UK falls into recession, or the conflict in the Middle East worsens, says Sophie Lund-Yates at Hargreaves Lansdown. Still, while EasyJet’s problems “are all outside of its control”, its “best-in-class operation” is about as good as it can be. In particular, its “measured expansion at high-calibre airports has proved an especially shrewd move”, as has the “supercharged effort to push easyJet holidays”. Both strategies have taken advantage of the fact that “cost and convenience” are now the “ultimate precursors to whether or not customers will splash on a trip”.
EasyJet is particularly well placed if the coming summer season turns out better than expected, says Kate Duffy on Bloomberg. It plans to increase capacity by 8% this year, while it has also hitherto minimised the supply chain hiccups that have left its competitors “struggling to field aircraft”. For instance, Ryanair is scrambling to get hold of Boeing 737 Max planes.
These supply constraints should help support demand, so it’s not surprising that easyJet CEO Johan Lundgren is optimistic.
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