Qantas dividend takes off after record profit result

Qantas chief Alan Joyce says the dividend is here to stay after revealing the airline’s best-ever profit result.

Qantas CEO Alan Joyce announces the annual results in Sydney yesterday.

Qantas chief Alan Joyce has declared that the long-awaited return of the airline’s dividend is here to stay after aggressive cost controls, the turnaround of its international business and lower fuel prices underpinned the company’s best-ever profit result.

Qantas yesterday broke its seven-year dividend drought thanks to a record pre-tax profit of $1.53 billion — a jump of 57 per cent — and as it built its free cash flow coffers to $1.7bn.

The record result underlined the bust to boom story that Qantas has endured over the past two years when in 2014 it sank to its biggest-ever loss of $2.4bn.

“This is the best result in the 95-year history of Qantas — and the best result in Australian aviation history, full stop,” Mr Joyce said.

Qantas celebrated its result with a $3000 bonus to staff and the reinstatement of its long-absent dividend. The Qantas board decided to return a dividend of just 7c — costing it $134 million — to shareholders while it builds up its stocks of franking credits to allow larger capital returns in the future.

“Going forward shareholders can expect the primary source of returns of surplus capital to be an ordinary dividend, then a special dividend and or a buyback. That’s our approach,” Mr Joyce told The Australian.

“I don’t think any company will ever be able to say to you they will switch it on forever because it depends on what the environment is.

“But the board has clearly said that the company generates surplus cash outside the financial framework given, and the prime source of returning that will be the ordinary dividend.”

While Qantas’s profit result was below analyst consensus of $1.6bn, the return of the dividend — which has been absent since 2009 — was cheered by investors yesterday who sent shares in the airline up 1.47 per cent to a four month high of $3.45.

“This ... in our view sends a strong signal to the market around ongoing sustainability,” said the analysts at Macquarie Equities.

“Qantas remains very cheap in our view and the resumption of dividends demonstrates management’s confidence in the outlook.”

The release of the fully franked dividend coincided with another share buyback totalling $366m.

But shareholders were not the only ones to be rewarded, with close to 25,000 of the airline’s employees being awarded a one-off “record result bonus” of $3000 — or $75m in total — so long as they are covered by an EBA that includes the company’s 18-month wage freeze provision.

The buyback and the return of the dividend means Qantas has committed $1.5bn in capital returns to shareholders in the past 18 months. Mr Joyce said the driving force behind its ability to maintain a recurring capital dividend as well as its return to massive profits was the company’s $2.1bn cost-cutting program.

“Essentially, without that we would have produced a loss,” he said. “You always have to remain vigilant with this business and we are very conscious of completing our transformation project, and focusing in on getting our costs down and to manage what we can manage, because you will get headwinds and tailwinds in this ­industry.

“We’ve got more to do. We’ve got another year of the transformation program and $450m to deliver on. I don’t think it will ever be complete. We have been in transformation for 95 years and if we are around for another 100 we will be transforming for that entire time.”

Yesterday the airline revealed that it had banked $557m worth of benefits from its transformation program in the year to June 30 for a total saving of $1.66bn since the program began two years ago.

Mr Joyce said much remained to be done as he looked to target another $450m in the year ahead to hits its $2.1bn target.

“We have a lot of technology areas kicking in. We have benefits of a revenue management system coming through. We’ve got a new disrupt management system to help us manage disruptions that is just starting to be delivered,” he said.

“We have the 787s arriving next year and the A320neos arriving. We have the new hangar in LA opening up and we have increasing productivity of the aircraft. So there are still a lot of projects in the pipeline ... and that’s why we are comfortable increasing the transformation benefits to $2.1bn for the three-year period.”

Qantas’s bumper profit result was bolstered by a 38 per cent jump in operating cash flow to $2.8bn and a 2.4 per cent increase in revenue to $16.2bn as the airline’s domestic, international and its budget brand Jetstar all posted record results.

Total underlying earnings before interest for Qantas’s domestic business, including Jetstar, ­jumped 20 per cent to $820m, while the airline’s international arm almost doubled earnings to $722m.

The continued depression in global oil prices (a key driver for the cost of jet fuel) continued to be a massive boon for Qantas, which saved $664m on its fuel bill for the full year.

The second-half savings from fuel were much lower than the $448m in savings accrued in the first half of the year. Fuel costs for the year ahead are expected to be no more than $3.2bn.

Qantas said it was planning for capacity growth of 2-3 per cent in the first half of the 2017 financial year, driven by its international business, which is expected to increase capacity by 4 per cent.

But the airline also warned revenue in the first half would come in weaker.