Is Qantas Airways Limited (ASX: QAN) set to become the highest dividend-yielding large cap stock on our market?
That may sound crazy to many given that the airline has not paid a regular dividend since 2009 (although it declared a 23 cent capital return last month) but that's about to change in a big way, according to the analysts at Macquarie Group Ltd (ASX: MQG).
In a sign Qantas has truly turned the corner, the broker predicted in its latest report that the airline will produce a dividend yield of 12.7% for the current financial year.
Despite the airline having a slight increase in its capital expenditure outlook, Macquarie is forecasting that Qantas will generate $2.05 billion in free cash flow and distribute 45.2 cents per share in 2016, which will come on top of a 2.5% share buyback.
Falling oil prices are one of the main contributing factors to Qantas' anticipated strong cash position. Macquarie estimates 2016 fuel costs will fall $300 million to $3.58 billion, which reflects an 11% drop in the average Brent oil price for 2015-16.
The broker's longer-term crude price assumptions have also declined around 7% to $US80 per barrel, which drives $700 million in additional cost savings for the airline through to 2018-19.
This means Qantas' current 2016 fuel guidance remains conservative despite low oil prices, according to Macquarie.
The big jump in Qantas' cash flow isn't dependent on strong growth in domestic passenger numbers either, and that's good news because of the sluggish outlook for domestic travel.
The broker expects that domestic capacity growth for both Qantas and Virgin Australia Holdings Ltd (ASX:VAH) to remain modest in the current financial year, and the market is tipped to grow by 0.8% to June next year.
"Our current estimates suggest that Qantas will once again be in a position to distribute capital in FY16," wrote Macquarie. "Factoring in our expectation for lower oil prices, as well as additional operational benefits, we estimate Qantas' operating cash flow will improve ~$1 billion."
There's more good news too. The high forecast payout for 2015-16 isn't a one off with Macquarie forecasting a 43.3 cents and 41 cents a share dividend for the following two years.
Macquarie has an "outperform" recommendation on the stock as Qantas is still trading at a discount to most of its global peers even though its share price has more than doubled over the past year. The broker has a 12-month price target of $4.50 on the stock.
Qantas shares are 0.4% higher at $3.56 during lunch time trade when the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has plunged 2.1% into the red.
