Why I’d buy this FTSE 100 stock that’s just increased its dividend by 43%

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Budget airline easyJet (LSE: EZJ) today reported a 16.8% rise in revenue to £5.9bn as it flew a record 88.5m passengers in its financial year ended 30 September. Headline pre-tax profit surged 41.7% to £578m, at the top end of its guidance of £570m to £580m. Brexit fears — more of which later — have so far failed to deter travellers, with the company reporting bookings for next summer“promising at this very early stage” and “slightly ahead of summer 2018.”

Bargain valuation

The shares are trading around 5% lower on the day at 1,120p, as I’m writing, and 37% below a high of close to 1,800p in June. With underlying earnings per share (EPS) of 118.3p — 43.4% ahead of the prior year — the trailing price-to-earnings (P/E) ratio currently stands at 9.5. This is well below the FTSE 100 historical average of 15 and, being under 10, I consider it to be in the bargain basement.

Furthermore, in line with the company’s dividend policy of a payout ratio of 50% of headline pre-tax profit, its board has recommended a 43% rise in the dividend to 58.6p. This gives a highly attractive running yield of 5.2%.

Great business

easyJet has been a hugely successful business since its launch in 1995 and has delivered terrific returns for long-term shareholders since its stock market flotation in 2000. It’s not only the UK’s biggest budget airline, but also the best managed of all London’s listed carriers, in my view.

There’s plenty in today’s results to support this view. Its revenue performance was market leading, it’s load factor (how efficiently it fills seats) was up to a record 92.9%, from 92.6%, and its headline operating margin advanced from 8.5% to 10%. Headline return on capital employed — a measure of how well a company is using its capital to generate profits — increased to an impressive 14.4%, an improvement of 2.5 percentage points on the prior year.

And there should be more to come, with management reporting good progress on new initiatives in loyalty, holidays and business, which are expected to deliver high-return, margin-accretive contributions.

Peak Brexit uncertainty

Why is the stock so cheap? Some analysts are concerned about fuel costs and currency effects, right now. However, I’m confident easyJet’s scale and efficiency, as well as its strong balance sheet and liquidity, positions it well for resilience in such an environment and, indeed, to take advantage of investment opportunities when weaker airlines suffer. For example, following the collapse of Air Berlin last December, easyJet acquired part of its operations at Berlin Tegel airport, catapulting it into a strong number one position in Europe’s third-largest market.

Brexit is perhaps the biggest factor weighing on investor sentiment. However, I think market pessimism about easyJet is way overdone. As the company noted today: “Both the EU and the UK have said that their objective is to maintain flights between the EU and the UK, whatever the Brexit outcome.” Furthermore, the company has already taken concrete steps — and appears to have good contingency plans — for managing the range of possible outcomes.

I think peak Brexit uncertainty has provided a fantastic opportunity to buy into a great business at a very cheap price. I rate easyJet as one of the best bargains in the market today.

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G A Chester 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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