EasyJet Faces Double-Edge Sword

The embattled budget carrier is expected to confirm its record growth for the year, but only because it's still in recovery mode.

Lagging in the Air

Unlike its rivals, Ryanair and Wizz, EasyJet's stock hasn't grown as strong over the last few months. It is still well below its pre-pandemic levels despite passenger numbers improving. Investors seem unhappy that the company is planning to skimp on dividing its profits to investors. Even after restoring the dividend earlier this year, the forward yield of 0.9% isn't particularly attractive.

On the other hand, the over 13x coverage ratio does mean the company is well capitalised. It's stingy with the payouts, which might have more to do with management worried that cash might be needed. Particularly as it continues to buy aircraft. EasyJet most recently reported 315 aircrafts on order, with an additional 100 purchase rights.

Confirming the Good News?

The company has already provided a trading update for the year and will likely confirm the numbers provided. That's when EasyJet said it saw a record profit increase to £650-670M for the fourth quarter, well above the £430M recorded in the same period immediately before the pandemic. It also guided Q1 capacity to increase 15% over the prior year.

What could be of more interest to investors as the budget airline logically should benefit from an environment where European travellers are looking for bargains is that management said it would look to increase its payout ratio going forward. The payout ratio is expected to double to 20% next year if approved by shareholders. However, the CEO did point out that the company would continue with its fleet upgrades, which would presume more investment of profits.

After three consecutive years of losses, EasyJet is poised to return to profits for the first time. However, being slow to return the money to investors might keep the share price under pressure.

Is It An Inverse H&S?

Despite holding the 400 support raises chances of an inverse head-and-shoulders pattern, the 5-wave structure down from the peak of 530 will likely weigh on upside attempts. Increased demand for the stock is unlikely to lead to meaningful bullish price action while below 500, even though bulls could still fill the gap at 475. Losing the round support may lead to a breakdown below 350, exposing 325 and the low of 275. However, invalidating the iH&S does not necessarily point to further declines.

Source: SpreadEx / EasyJet

Key Takeaways

EasyJet is anticipated to confirm its record growth for the year, albeit still in recovery mode. The airline has seen a different growth than its rivals, and its stock is still below pre-pandemic levels even though passenger numbers have improved. The company's plan to limit dividend payouts to investors has caused displeasure among shareholders. However, EasyJet has demonstrated strong capitalisation with a 13x coverage ratio, which can be attributed to its conservative dividend strategy. Despite returning to profits after three years of losses, the slow pace of return could keep the share price under pressure.