Isnt it astonishing how quickly oil prices have fallen? I cant think of anyone who predicted a fall on this scale, though as alwaysit seems obvious inhindsight. AndI suspect this ismore than just a blip;I think wehave entered a new era of low oil, gas and mineralprices.
As I commute to work by car, Ive already noticed the difference in my monthly spend. Many companies will benefit, includingcar makers and consumer goods companies.But the clearest winners are the airlines.
I bought easyJet at 1600p justa few weeks ago. Since then, the share price has alreadyincreased to 1862p. This is a company thatwassuccessful even when oil prices were high. Low fuel costs mean thatprofits will riseeven more quickly.
You could argue that, as costs fall, more people will travel via premium airlines, but I think budget airlines will still be popular. After all, just as Aldi and Lidl has many wealthy shoppers, customers will always want to save money on their flights. And as no-frills airlineslike easyJet have low costs, there ismuch scope to grow profits.
Earnings per share recorded and predicted show just how quickly easyJets profits are increasing:
The share price has already risen a lot, as the companys popularity has buoyed profits. But it is still reasonably priced, with a 2015 P/E ratio of 13.2, falling to 11.8 in 2016. The dividend yield is 3.0%, rising to 3.3%. So this company combines growth with a high yield, and is still a buy.
International Consolidated Airlines
I have also been thinking of buying IAG, the owner of British Airways and Iberia. This is a company thatprovides a premium service at a very reasonable price. IAG was at one point loss-making as it fought to turn around Iberia. But it is now highly profitable. And these profits are set to grow as gasoline prices fall.
I also think IAGs takeover of Aer Lingus will boost earnings. IAG reduced its capacity during the era of high oil prices,when the aim was to fly just the most profitable routes. But when fuel is this cheap, and with a limited number of flight slots, you want to increase volume as quickly as you can.Expect there tobe more mergers and acquisitions in the future as the airlines adapt to this new world of low energy prices.
The earnings per share progression gives an indication of how low fuel prices is affecting the fortunes of the airlines:
IAGs share price has also been heading skyward, yet with a 2015 P/E ratio of 11.1 and a dividend yield of 2.2%, this is, like easyJet, both a growth and a high-yield play, and for me is still worth buying into.
I would rate both easyJet and IAG as worthwhiledividend plays. The returns that an increasing share price combined with a high yield can provide can make the difference betweenmediocre returns and serious wealth. That’s why we at the Fool have written an easy-to-follow guide to this crucial investing technique.
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