Qantas Airways Limited (ASX: QAN) shares have made a huge recovery from the bottom of the COVID-19 crash. Could the ASX travel share be a future dividend champion for investors?
Of course, it's worth pointing out that Qantas hasn't paid any dividends yet post-COVID. However, the cash is flowing to investors in the form of a share buyback at the moment. It's currently carrying out a $500 million share buyback.
In the FY23 half-year result, it generated statutory net profit after tax (NPAT) of $1 billion, or 53.9 cents in earnings per share (EPS) terms.
Could Qantas shares pay good dividends?
Before COVID-19 hit, the business was doing well. It was actually paying dividends to investors.
It paid a dividend in 2016 and then grew its dividend each year to 2019.
In 2019, the ASX travel share paid an annual dividend per share of 25 cents. If the airline were to pay that again, at the current Qantas share price, it would be a grossed-up dividend yield of 5.5%.
That's a decent dividend yield for a business, particularly one that's just getting back to profitability.
Considering the business made statutory EPS of 53.9 cents, a dividend of 25 cents would seem like a reasonable dividend payout ratio.
Estimates on Commsec suggest that the Qantas dividend could be re-instated in FY25. The annual dividend per share could be 22 cents. In FY23 it could make 92.6 cents of EPS and this could rise to $1 by FY25.
At the current Qantas share price, this would value the ASX travel share at 7 times FY23's estimated earnings and 6.5 times FY25's estimated earnings.
If Qantas were to make $1 of EPS and pay a 50 cents per share dividend, it would be a grossed-up dividend yield of 11%.
How likely are dividends?
I think Qantas is doing a lot of the right things to perform well on behalf of shareholders. The airline said that its net debt had declined to $2.4 billion by the end of the first half.
The stronger the balance sheet, the more likely that dividends could flow.
I don't think that Qantas is going to pay a dividend in FY23 as it continues to work on improving the balance sheet after COVID-19.
But, I think that during FY24, there could be a payment of a dividend, or at the very least a mention of a return to paying dividends to shareholders.
As international travel returns to normal levels, I think that Qantas will see attractive levels of profit each year, enabling it to keep growing profit.
Unless Qantas has a great place to invest all of its generated cash, I think it makes sense to send some to shareholders and unlock the franking credits.
Foolish takeaway
I'm not expecting that Qantas is about to become the next Commonwealth Bank of Australia (ASX: CBA) when it comes to dividends. But, with how cheap the valuation is, I think it could pay appealing dividends by the middle of the 2020s.
But, I think the key reason to consider the business is the ongoing strong demand for travel.
