Qantas Airways Ltd (ASX: QAN) shares are sitting well below analyst targets and offer a fully-franked dividend yield of 3.93%. Is it time to buy?
Qantas is Australia’s leading airline. It was founded in the Queensland outback in 1920. The Qantas name was originally Queensland and Northern Territory Aerial Services. The company operates two main airlines – Qantas and Jetstar – and subsidiary businesses including other airlines, businesses in specialist markets such as Q Catering, Qantas Freight Enterprises and the popular Qantas Frequent Flyer program. It employs some 30,000 people with around 93 per cent of them based within Australia.
A recent Rask Media article detailed the current analyst price targets on Qantas shares, showing an average price target of around $6.50. Since then, shares have fallen slightly to $5.60.
While analyst targets should never be blindly trusted, they suggest that Qantas shares are undervalued by around 16%. This surely justifies a closer look at the shares.
One appealing aspect of Qantas shares is the dividend yield. While the 3.93% offered by Qantas shares pales in comparison to the dividend yields of the banks like Commonwealth Bank of Australia (ASX: CBA), the Qantas dividend arguably looks safer in today’s environment.
For an in-depth explanation of why that may be the case, see the Rask Media article “Why Big 4 ASX Bank Dividends May Soon Be Cut”.
Two Things I Like
Two aspects of Qantas that look enticing are the high return on invested capital (circa 20%) and the commitment to buying back shares.
A high ROIC demonstrates Qantas’ ability to profitability invest its capital, while the share buybacks add value to an investor’s holdings by increasing the percentage ownership of each shareholder.
One risk to watch out for is the earnings per share figure in the annual report. Investors should consider that the EPS figure will be skewed by share buybacks, so the EPS could be made to look “artificially” higher without actually increasing earnings.
If analysts are to be believed and you’re not confident that the banks can sustain their dividends, Qantas shares may be worth a closer look.
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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.