THE DAILY ENCRYPT

[date-today format='F j, Y']

I’m following Warren Buffett’s advice on IAG shares

With IAG shares down again today is this a buying opportunity? Stephen Wright turns to Warren Buffett for help. The post I’m following Warren Buffett’s advice...
Photo by Mathew Schwartz

Warren Buffett has — to my knowledge — never owned shares in International Consolidated Airlines Group  (LSE:IAG). But the Oracle of Omaha has some advice that I think is helpful when thinking about whether or not I should buy IAG shares. 

The business

The last few years have been tough for IAG. First there was the pandemic, which halted air travel across the globe. Then the awful Russian invasion of the Ukraine prompted Russia to ban UK airlines from travelling through its airspace. Today, the company finds itself with total debt that’s up 161% from 2019 and a share price that is the lowest it has been this calendar year. 

It’s not all bad news, though. The company reported a loss in 2021, but it expects to return to profitability in 2022. Bookings for this summer are up and the company is forecasting around 85% of its 2019 capacity to return this year, as long as there are no further political or pandemic-related disruptions. 

This means that there’s clearly reason to think that the worst is over for IAG and the airline sector. I think IAG also compares favourably with other airlines from an investment perspective. Its current interest payments account for around 4% of the operating income it generated in 2018. This compares favourably with EasyJet (25%) and Ryanair (11%).

Does this mean that I should buy IAG shares, though? As is so often the case, I find Warren Buffett’s advice on this subject helpful.

Buffett on airlines

In the 2007 letter to Berkshire Hathaway shareholders, Buffett made the following now-famous statement about airlines: The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers.”

Buffett’s point here is that the airline industry as a whole is unattractive as an investment proposition.  The problem is a vicious cycle. First, airlines are in constant need of money. It takes a lot of money to run one, with costs including aircraft, servicing, landing fees, staff, and more. 

Second, they are unable to offer investors with an adequate return on their cash. Competition in the airline industry is ferocious and this results in extremely low prices. This means that airlines can’t generate enough cash to provide an adequate return to investors, which leaves them in need of further money and the cycle continues. This severely limits the attractiveness of IAG shares as an investment.

Conclusion

Airlines have had a difficult couple of years. But the worst seems to be behind them and I think this might have a positive impact on IAG shares over the next few months. As an investor, however, I’m looking for investments that I can hold for a longer duration. From this perspective, I don’t see IAG shares as attractive. If I were going to invest in an airline, it would be IAG. But I think that there are better opportunities in the market right now, so I’ll avoid the airline sector.

The post I’m following Warren Buffett’s advice on IAG shares appeared first on The Motley Fool UK.

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you’ll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

Since 2016, annual revenues increased 31%
In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

More reading

Why the IAG share price fell 5% in February
Should I be adding IAG shares to my portfolio?
The IAG share price: where will it go next?
Why IAG shares could be among my best FTSE 100 buys in 2022
Could the IAG share price double my money?

Stephen Wright owns Berkshire Hathaway (B shares). 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.

admin

admin

admin

admin

© 2022 The Daily Encrypt. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

Latest News
PRESS RELEASES