Macquarie Group Ltd tips Qantas Airways Limited to hand out $3.5bn to shareholders

Credit: Joits

The Flying Kangaroo has become the company that can’t stop giving. Shares in Qantas Airways Limited (ASX: QAN) have taken off on the back of a series of strong profit results over the past couple of years and there’s now another reason why the stock could be set to climb higher.

Macquarie Group Ltd (ASX: MQG) is predicting that Qantas will splash investors with cash over the next few years that could exceed $3.5 billion!

Talk about “Helicopter Ben” (the nickname of ex-US Federal Reserve president, Ben Bernanke, who embraced the idea of throwing cash out of a helicopter to stimulate the economy) – Qantas CEO Alan Joyce deserves his own emoji!

Shares in Qantas are up over 52% over the past 12 months when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) has only managed to edge up less than 6%.

There’s probably more left in the tank for Qantas too if the airline was to undertake a bigger-than-expected capital return program over the next three years.

“In order for Qantas to maintain its ‘optimal capital structure’ we estimate that it could deploy more than A$3.5bn in capital management initiatives to FY20 (this implies A$5.8bn adjusted net debt),” said Macquarie, who has an “outperform” recommendation on the stock with a price target of $7.42 a share.

This isn’t a base case prediction though. Macquarie is taking a more conservative approach and has only factored in $1.6 billion in additional buybacks in FY19 & FY20, and $800 million in dividends.

Favourable operating conditions should also provide a tailwind for the airline. The market is moving away from cut-throat price competition and demand for domestic travel is expected to stay buoyant.

“Qantas has returned the international business to profitability for more than two years (accounts for 20% of EBIT) through joint venture agreements (capital light approach) and cost out programs,” said the broker.

“Despite these changes, including record Qantas Domestic profitability (rational market) and growth in Qantas Loyalty it continues to trade at a 20% discount to its long-run average (EV/EBITDAR) and 30% discount to peers.”

This essentially means that if the discount was unwound, Qantas’ price target would rise to $10.03 per share.

The outlook for the travel sector is pretty positive and it isn’t only Qantas that is performing well. Virgin Australia Holdings Ltd (ASX: VAH) has also been rallying over the past year and results from Flight Centre Travel Group Ltd (ASX: FLT) and Webjet Limited (ASX: WEB) have given me reason to think that the good times in the sector will persist for a while yet.

But there is another sector poised to outperform strongly in 2018. The experts at the Motley Fool are particularly bullish about the prospects for this niche sector.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Flight Centre Travel Group Limited. The Motley Fool Australia has recommended Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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