ASX 200 shares are still cheap! Here's one to consider buying now

Growth and dividends are the two vital ingredients, according to one broker.

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Despite the S&P/ASX 200 index (ASX: XJO) rising 7.5% in the last 12 months, many shares with strong fundamentals are still trading at attractive valuations.

Among these, Qantas Airways Ltd (ASX: QAN) stands out as an excellent choice, according to one top broker.

As my Foolish colleague James covered this week, analysts at Goldman Sachs believe Qantas shares remain undervalued. In a recent note, they set a price target of $8.05 apiece, with an upside potential of 33% over the next 12 months.

Why this ASX 200 share is a bargain

Goldman Sachs analysts reckon that the market is underestimating Qantas' stronger earnings potential.

The broker cites Qantas' $1 billion cost reduction program and improved operational performance as key drivers of future growth.

In particular, it projects "earnings capacity to structurally improve… with FY 2024 estimated [profit before tax] 51% ahead of pre-COVID levels".

The current undervaluation is a prime buying opportunity, Goldman says, noting "[t]he discounted valuation versus peers and its own history implies that the market is pricing in a trade-off between investment (fleet and customer) and capital returns (dividends & buybacks)".

Qantas' loyalty division is another key growth driver. In the first half of FY 2024, the division contributed $270 million in underlying earnings before interest and tax (EBIT), up 23% year-on-year.

The airline aims to boost this segment's EBIT to $800 million to $1 billion by FY 2030, enhancing overall profitability.

Add dividends to your Qantas shares

Moreover, Goldman Sachs anticipates the return of this ASX 200 shares' dividend soon, adding to the bullish potential for Qantas shares.

Moving forward, Goldman Sachs expects Qantas to maintain a strong balance sheet, allowing for capital returns alongside fleet renewal. This, it says, should support healthy dividends and share repurchases.

The company has already announced an increase in its on-market share buyback by up to $400 million in its H1 FY 2024 results.

Analysts at Goldman now forecast a total of $1.6 billion in buybacks and dividends over FY 2025-2027. This includes $1.2 billion in dividends (73.6 cents a share).

If this were to materialise, it would translate to a forward dividend yield of 12.4% at Qantas' current market capitalisation of $9.6 billion at the time of publication.

Goldman isn't the only broker bullish on Qantas. The total 17 brokers covering the stock listed on Bloomberg are either neutral or bullish on the company – but none bearish – according to The Australian Financial Review.

How attractive is the valuation vs. ASX 200 shares?

Currently, Qantas trades at a price-earnings ratio (P/E) of 6.6 times — significantly below the current ratio of 18 times for the exchange-traded fund (ETF) that tracks the benchmark index, iShares Core S&P/ASX 200 ETF (ASX: IOZ).

This represents value, as investors are paying $6.60 for every $1 in Qantas' earnings versus $18 per dollar of earnings for the ETF.

In return, you are potentially buying shares in a company that recently produced $1.25 billion in underlying profit before tax. Qantas is also in "new identity" mode after recent scandals tarnished the brand. And, it is projected to return $1.6 billion of capital to shareholders in the next three years.

Foolish takeaway

Qantas could be an interesting investment opportunity due to potential valuation mismatches if analysts are right. Strong earnings potential and the imminent return of dividends are two factors that could make Qantas a top pick for savvy ASX investors looking for growth and income.

Qantas shares are trading 13% higher this year to date but are down 9% on this time 12 months ago.

Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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