When it comes to our dividend portfolio, we are heavy in the financial sector, so ideally we want to add stocks in the other sectors to diversify our portfolio. While we do use Michael Weber's Canadian Dividend All-Star list for screening purposes, we also try to look for other lesser known dividend stocks. Recently we've been looking at some potential future dividend stars that might be overlooked by the typical dividend growth investors.
While going through some of the well-known Canadian brands, I came upon WestJet. WestJet is probably not considered as your typical dividend growth stock, especially when it's not even on Michael's list. To be honest, I've been looking at WestJet since around 2009 but never seriously considered making a purchase until recently.
We purchased 57 Shares of Westjet (WJA.TO).
WestJet is a Canada-based company engaged in the provision of airline service and travel packages. The company was founded in 1996 with three aircraft, five destinations. WestJet was primarily a company that flies within Canada but has expanded its operations outside of Canada in recent years. Today the company owns 122 aircraft and flies to approximately 93 destinations in North America, Central America, the Caribbean, and Europe. The company plans to continue expanding its offering in the future.
Valuation & Performance
From a valuation point of view, WestJet is quite attractive. The stock currently trades at a PE ratio of 10.31, a forward PE ratio of 7.9, and an expected 5 year PEG ratio of 0.6. When I see a stock with PEG ratio lower than 1, I get quite excite because it tells me that the stock has a lot of growth potential.
The stock has dropped about 30% from its 52 week high. When a stock does that you would expect some bad news, but that doesn't seem to be the case for WestJet. The Q1 earnings showed that the company is doing quite well. WestJet showed it was able to attract guests and make more money as the total guests increased by 2.2% to 4.91 million and the net income rose by more than 55% to $140.7 million. At the same time, the company was able to reduce its operation cost per seat by 7%. Just recently WestJet reported a 6.6% increase in May traffic and an increase of capacity of 9.1%. These are all very good news from a company performance point of view.
WestJet started paying dividend in late 2010 and has raised dividend 5 times since that time. The average dividend growth in the past 3 years is 34.23% and the company just recently increased the dividend payout by 16.7%. At current $0.14 dividend per quarter, the stock has a dividend yield of 2.09% and a payout ratio of 21.54%. With such low payout ratio, I believe WestJet can continue its high dividend growth rate in the years to come.
The airline business is very cyclical. People tend to fly more when the economy is doing well. When the economy is bad, people usually will cut their vacation budget first. This is the same thing for businesses as well. Furthermore, fuel cost is a big expense for airlines so an increase in crude price will have a negative impact to WestJet's profit. Fortunately, right now the economy is doing well and the fuel cost is low. While these two factors should continue to be favourable for WestJet in the near term, no one can guarantee these factors will remain favourable forever.
Price competition is another risk that WestJet faces. As competition heats up, other airlines may reduce airfare to attract more customers. WestJet may be forced to do the same, causing the overall revenue to drop.
I like WestJet simply because I've always had good experience flying with them. If given the choice of flying with WestJet, Air Canada, or United, and the airfare is comparable between the three airlines, I'd rather fly with WestJet. WestJet has also been doing these annual Christmas miracle campaigns, showing it really cares about its customers.
Although WestJet is currently not on the Canadian Dividend All-Star list, I expect it to show up on the "Others" list probably by next year and get on the All-Star list in the next two years. The WestJet board has shown that they're willing to raise the dividend payout to reward shareholders. While the stock is cyclical, WestJet has shown consistent solid performance since the company went public. Considering the low payout ratio, the company should be able to weather a few bad quarters if that were to happen. In the near term I expect the company to continue generating solid profits.
This purchase added $31.92 in our annual dividend income.
What do you think about our WestJet purchase?