After recent declines I believe this FTSE 100 stock and its 4% yield are too cheap to ignore

If you had invested £10,000 in British Airways-owner IAG(LSE: IAG) back in October 2008, today your investment would be worth just under £50,000. Over the past decade, as the company has gone from strength to strength. Shares in the business have produced an annual return for investors of 17.4%.

This outstanding return puts IAG in an elite club. There are only a few FTSE 100 businesses that have been able to achieve high-teens share price growth for investors since 2008. The index as a whole has produced an average annual return of just 7%.

Just getting started

I believe there’s still plenty to come from IAG. The past few years have been about stabilising the business, cutting costs at its Spanish airline Iberia, restoring growth at BA, and adding new airlines to the group. Additions include Aer Lingus and Vueling, which have helped IAG improve its customer offering and achieve attractive economies of scale.

Now that the business has been stabilised, it would appear that management’s future focus is growth.

Today, CEO Willie Walsh and his team are laying out their goals for the business over the next five years. During this period, they hope to achieve an operating profit margin of between 12% and 15%, and grow earnings per share at a rate of 12% per annum.

If the company can achieve this forecast, the shares look to be a steal. Analysts have the group reporting earnings per share (EPS) of €1.16 for 2018. An expansion of 12% per annum until 2023 implies IAG will earn €2.04 or 179p per share by the end of the five-year period.

These numbers indicate that the airline is currently trading at a 2023 P/E of just 3.5. On top of this, on a trailing 12-month basis, the dividend yield stands at 4%. Considering all of the above, I think shares in IAG are a ‘strong buy.’

Slowing growth

On the other hand, I’m not so positive about the outlook for low-cost carrier Wizz(LSE: WIZZ).

Heading into 2018, analysts were optimistic about the outlook for up-and-coming Wizz Air, predicting full-year EPS growth of 27% for fiscal 2019. However, as the year has progressed, analysts have downgraded their forecasts. The City is now expecting the company to report growth of just 9%. High single-digit earnings growth is still attractive, but considering shares in Wizz are changing hands for 11.4 times forward earnings, compared to IAG’s forward P/E of just 6, it seems to me that this smaller carrier needs to do more to justify its higher valuation.

There is also no dividend yield on offer for investors. The one advantage Wizz does have over its larger peer is its strong balance sheet. At the end of fiscal 2018, the firm reported a net cash balance of €947m, nearly half of its market capitalisation.

Still, this isn’t enough to convince me that Wizz is a better buy that IAG, especially considering the latter’s long-term growth guidance for investors and its attractive dividend yield.

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Rupert Hargreaves owns no share 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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