Why fat dividends from International Consolidated Airlines Grp SA leave me cold

British Airways owner International Consolidated Airlines Group(LSE: IAG) delivered its full-year results today and the shares are down around 5% as I write. Yet the figures aren't too bad. Revenue lifted 1.8% compared to a year ago and adjusted earnings per share are 14% higher. The directors seem pleased and confident about the outlook because they've pushed the full-year dividend up almost 15%.

An impressive stable of brands

Indeed, the dividend yield is one of the first things that shouts at you when you look at the stock. Today's share price around 592p throws up a forward yield for 2019 of 4.6%, which looks attractive at first glance. The forward price-to-earnings ratio looks low too, running at just under six.

If you want to hold shares in an airline company, International Consolidated Airlines is an interesting one. It's a big operation with names such as Iberia, Vueling, Aer Lingus and others in the stable alongside British Airways. The formation of the company brought together airlines in the UK, Spain and Ireland and it operates around 550 aircraft to more than 280 destinations. On top of that, the firm runs several aircraft fleet services and also carries out airline marketing, operations, freight, insurance, maintenance, storage and custody services.

Yet despite what seems a robust set-up, which has delivered rising cash flows, revenues, profits and dividends over the past few years, I'm wary of the stock. So is the market, judging by the firm's low-looking valuation. It's true that the company pays a fat dividend but I wouldn't buy and hold long-term for that, because as well as being a dividend-payer, the company operates in a notoriously cyclical sector. We only have to look at the share-price chart to see how responsive it is to the downside at the slightest whiff of macroeconomic wobbles.

The chief executive is undaunted

This stock is good for cyclical trades over various time frames but I'd keep that strategy clear in my mind if I invested. I can't risk the share price, profits and dividend being in a cyclical trough by the time retirement arrives when there are more suitable long-term investment vehicles elsewhere. I think the market is keeping IAG's valuation low because it 'knows' that, one day, cyclical macroeconomic factors will combine to pull the rug from beneath the firm's profits. That's why the share price dips when the economic outlook gets scary. At some point, such dips will likely be fully justified by a deteriorating financial performance.

For now though, Chief Executive Willie Walsh sounds chipper. He said in the report: "Our confidence in IAG's future remains undaunted and today we're announcing our intention to undertake a share buyback of EUR500 million during 2018". At current fuel prices and exchange rates, the firm says it expects its operating profit for 2018 to show an increase year-on-year, and both passenger unit revenue and non-fuel unit costs to improve at constant currency rates.

Okay, things are holding up for now, but I'm looking elsewhere for the stocks that are going to propel me to a comfortable financial retirement because International Consolidated Airline Group's fat dividends leave me cold.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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