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Is Virgin Australia a buy?

Richard Branson, founder of Virgin Australia (ASX: VAH), said he would sell his remaining stake in the airline for the right price, but is it worth buying?

For me, the short answer to the question is no and the long term answer is maybe. That’s the nature of airline stocks — all it takes is one pilot to make a mistake and the company will be reduced to almost nothing. I can’t think of many industries where that amount of market power is held in the hands of so many in one organisation.

No one likes debt, but Virgin has recently committed to more of it in buying Tiger Airways in a move geared to challenge the Jetstar and Qantas (ASX: QAN) relationship in Australia. Prior to the deal, Virgin was making a return to profit, but now it has a debt-to-equity (D/E) ratio of 180%. Some might consider it a long-term investment, but it might be a long, turbulent flight home. The company pays no dividend and is already sitting at a slightly pear-shaped P/E ratio of 15.3.

If you wanted some exposure to airline stocks perhaps Air New Zealand (ASX: AIZ) is a healthier option, currently trading at a premium price-to-earnings ratio and a D/E ratio of 100%. In the last 12 months its share price has increased 95%, and through its 19% ownership stake in Virgin it has code share arrangements in Australia, meaning it can advertise and sell tickets for both carriers. In addition it also pays a 7% dividend.

Australian Infrastructure Fund (ASX: AIX) and Sydney Airport (ASX: SYD) are also worth considering for your portfolio. Once again, the latter of the two has a large amount of debt that concerns me, at 314% of equity. However, it pays a healthy dividend and has shown good international travel rates, and with the possibility of a second international airport in Melbourne, it may start to see increased pressure from other destinations.

On the other hand, Australian Infrastructure Fund has continually delivered for investors, returning 39.6% and 12.8% in the last 12 months and five years respectively, on average. Together with a healthy outlook on the future and decent dividend, this could be the next company that will take your portfolio flying.

The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get 3 Stocks for the Great Dividend Boom in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

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The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Owen Raszkiewicz owns shares in Air New Zealand.

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