Historically, airline stocks are risky investments because the companies move with economic cycles. Economic downturns in the past caused multiple bankruptcies. However, the arrival of COVID-19 changed the future of the air travel industry. Only a few can survive the pandemic’s whiplash. Air Canada (TSX: AC), for example, is standing on thin ice.
Canada’s most dominant carrier has lost its allure as an investment option. You wouldn’t want to take a position in a company that lost 90% of its capacity due to the spread of COVID-19. Travel demand is dry and projected return to pre-corona levels not earlier than 2023. Hence, forget Air Canada and buy a high-yield dividend stock instead.
Between Canadian Utilities (TSX: CU) and Canada’s most dominant carrier, the former is a no-brainer buy. Unlike airline companies, a diversified utility company will remain standing regardless of the market environment. The utility stock is down 12.6% year-to-date versus Air Canada’s 63% losses.
Head-to-head
It would be no contest if you were to choose between a Dividend Aristocrat and a non-dividend-paying industrial stock. You would be investing in a company that boasts the longest streak of dividend increases (48 consecutive years). With Air Canada, you’re only banking on the stock’s appreciation to earn a windfall.
Canadian Utilities offers both steady income and price gains. At present, the dividend offer is a high 5.23%. In the next 12 months, market analysts forecast the stock to rise 39.35% from $33.01 to $46. Hence, you win both ways with your choice. Air Canada admits that capacity and revenue will return to pre-virus levels by 2023.
Investors hoping to get rich from airline stocks are shooting for the moon. A quick rebound is unlikely except perhaps a COVID-19 vaccine coming earlier than expected. Canadian Utilities is not a hit-or-miss thing. You have certainty than clouds of doubt. Your money will grow and not be stagnant for three years or more.
Losses vs. earnings
Air Canada is averaging $1.4 billion in net losses in the first two quarters of 2020 versus the $344 million average net earnings in the same period last year. Although adjusted earnings fell 16% (from $326 million to $273 million) in the first six months of 2020 compared with the prior year, Canadian Utilities didn’t incur losses.
The lower adjusted earnings of Canadian Utilities were mainly due to the sale of its fossil fuel-based electricity generation business and 80% stake interest in Alberta PowerLine. You can include$15 million in prior adjusted earnings from Electricity and Natural Gas Transmission regulatory decisions received in the Q2 2019.
For Air Canada, air travel demand is nearly non-existent. Its management also expects an average daily cash burn of $15 to $17 million in Q3 2020. The problem compounds after the government announced on August 28, 2020 that the existing restrictions on international travel will remain until September 30, 2020.
Uneven match-up
If it were a boxing match, the tale of the tape gives Canadian Utilities a tremendous advantage. An upset is close to impossible because Air Canada will not last the distance. You already know the winner before the bell rings for the first round.
