WestJet Airlines Ltd. Is at a 52-week Low. Should You Buy it?

WestJet Airlines Ltd. (TSX:WJA) fell 31%, but because of its cyclical nature, investors should only buy when its shares are cheap for a turnaround trade. Should you buy it today?

The Motley Fool

WestJet Airlines Ltd. (TSX:WJA) fell 31%, but because of its cyclical nature, investors should only buy when its shares are cheap. It doesn’t matter what kind of investor you are. No one wants to overpay for a company. Here is a company that pays a 2.4% dividend, but has been growing it for multiple years at a fast rate. It’s rare for an airline to have this kind of track record.

However, due to an analyst downgrade, its shares continue to fall after essentially trading sideways for three months. Now that WestJet has fallen 31% in price and is hitting its 52-week low, is it time to buy its shares? First, let’s take a look at the airline’s business.

The business

Founded in 1996, WestJet’s principle has been to be a low-cost choice for travelers without compromising service quality.

WestJet’s business is cyclical. So, there are times when its net earnings may decrease or even be negative, and this can go on for multiple years.

wja-net-earnings

Source: Slide four, WestJet’s May Presentation (arrows added by author)

Because of its cyclical nature, investors must pay particular attention to not overpaying for the company.

Dividend history and safety

WestJet has increased its dividend for five years in a row, which is a pretty good record for a Canadian company, let alone an airline. In four years’ time, WestJet increased its dividend at a compound annual growth rate of 29%; that is a smoothed-out increase of 29% per year.

The last hike was in quarter one of 2015 with a growth rate of 16.7%. With its payout ratio sitting around 19%, WestJet’s 2.4% yield has a margin of safety and should continue growing.

Is WestJet cheap or expensive today?

At under $24 per share, WestJet is trading at a multiple of 9.8 using 2014’s earnings per share (EPS). In recent years it typically traded between a multiple of 12-13.5, which implies a fair price of $30-34 based on EPS growth of close to 8% per year. This equates to a discount of 20-29%. In other words, WestJet shares are cheap today.

Should Foolish investors buy today?

If you want only the highest-quality companies for your portfolio, WestJet is not your kind of stock as it only has an S&P credit rating of BBB-. However, I think that using WestJet as a trade is a possibility. It would depend on the multiple expansion to 12-13.5 that is backed by company growth.

Investors who have the patience to invest for at least a couple years can buy its shares with a target capital gain of 20-29% for a turnaround trade.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng has no position in any stocks mentioned.

More on Dividend Stocks

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »

Payday ringed on a calendar
Dividend Stocks

3 Dividend Stocks That Pay Me More Than $54.57 Per Month

These three dividend stocks have done me well over the years, so let's look at how much I've gotten in…

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Royalty: 3 Fabulous Stocks to Buy Now for Decades of Passive Income

Rogers Communications stock and Canadian Natural Resources stock could pay you dividends for decades to come.

Read more »