The Qantas Airways Limited (ASX: QAN) share price has soared 66% in 2024 to date, a huge rise for the ASX travel share. However, it's possible the company may have further gains to come.
Of course, past performance is not a reliable indicator of future performance. It'd be unwise to expect Qantas shares to rise another 66% in 2025. However, if the company is undervalued, then it could still be an appealing investment.
Broker Morgan Stanley has been examining the current travel environment, fuel costs, and valuation and has concluded that the airline business could still be undervalued.
Strong operating conditions to help Qantas shares?
According to the Australian Financial Review, the broker is still bullish about Qantas despite its high valuation this year.
Morgan Stanley analyst Andrew Scott said:
Demand remains robust and fuel has shifted to become a tailwind. Going forward, favourable market dynamics and returns on capital expenditure provide confidence and point to upside risk.
Scott also suggested that concerns about capital expenditure requirements regarding the ASX travel share's fleet renewal program were overshadowing the potential returns, particularly because the company is expected to start paying franked dividends in the current financial year.
The Morgan Stanley analyst said:
We see this as an important milestone with the opening of the door to income-focused investors and a likely increased attractiveness for retail investors.
Taking all of that into account, Morgan Stanley's Andrew Scott said the airline's prospects were still "not fully appreciated by the market" at this Qantas share price.
How big the dividend could be
The rallying Qantas share price has pushed down the airline's potential dividend yield, but it could still be attractive.
According to the projection on Commsec, Qantas is forecast to pay a dividend per share of 17.5 cents in FY25. That would translate into a fully franked dividend yield of 2% and a grossed-up (including franking credits) dividend yield of 2.8%.
Shareholders may then get another dividend increase in the 2026 financial year, with Commsec projecting that the annual payout could be 26 cents per share in FY26. That would translate into a fully franked dividend yield of 2.9% and a grossed-up (including franking credits) dividend yield of 4.2%.
The dividend yield may not be that high, but the dividend payout ratio is forecast to be less than 25% in both FY25 and FY26.
According to the earnings projections on Commsec, the Qantas share price is valued at 8.5x FY25's forecast profit and around 8x FY26's forecast profit.
The company could still be undervalued if its price-earnings (P/E) ratio remains in the single digits.
