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Stock Watch: TUI

Emma-Lou Montgomery

Emma-Lou Montgomery - Fidelity Personal Investing

Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

The collapse of Thomas Cook, the world’s oldest package holiday proved that life is anything ‘but a beach’ for travel companies.

TUI (TUI), the world’s largest tour operator, has held its own - so far - but it is has certainly had more than its fair share of issues to deal with. After the grounding of the 737 Max jet, the consumer spending slow down and all eyes on whether it would be next in the wake of the demise of Thomas Cook, it now has the global coronavirus outbreak to contend with. The group keeps facing challenge after challenge.

TUI has already estimated that the grounding of the Boeing 737 Max fleet will cost it in the region of €400 million this year if it’s not returned to service by April. February is crunch month, because if it remains out of action, as now appears most likely, TUI has said it won’t have enough time to prepare the fleet for its summer high season.

Boeing, which builds the 737 Max, had said it hoped the redesigned 737 Max would be approved by the US Federal Aviation Administration by the end of last year, but that didn’t happen. For TUI, which was the UK’s biggest operator of the 737 Max Model 8, with 15 of the planes in its fleet and a further 72 on order, the grounding of the planes following those two fatal crashes, has come at a hefty financial cost. The Anglo-German holiday group company lost €293 million in earnings because of it in 2019.

However, upgrading TUI shares to a buy, but keeping its target price at £10.40 ahead of next week’s first quarter update, analysts at HSBC said while there was no doubt that the key focus would be on the timing of the 737 Max return and how bookings have gone for summer 2020 holidays, investors “should look past” the impact from the Boeing 737 Max problems.

TUI said in December that the latest trading momentum had been positive and that it was expanding its summer 2020 capacity by 14%, while recent market data suggests pricing of holiday packages has picked up since the collapse of Thomas Cook.

Of course, since then though the outbreak of the coronavirus has created a new potential set of problems for the tour operator. During the SARS epidemic, the travel industry was hit hard as the number of travellers fell heavily in several regions. And even though tour operators, like TUI, have low levels of customers from China, HSBC said “concerns are clearly being priced in for a weaker booking environment”.

TUI shares, which appeared to be making a recovery at the tail-end of 2019 after a very difficult year, have dived again since the start of this year as coronavirus fears have hit all travel companies. As we are yet to see how this plays out, it’s likely that those fears will keep the share prices depressed; at least for now.

That won’t please shareholders who have already been told that dividend payouts will be lower going forwards. Back at the start of December, TUI said it would introduce a new dividend policy; paying lower dividends to shareholders, but guaranteeing a minimum payout irrespective of the market environment.

This means that for the 2020 financial year onwards, the company will pay a core dividend payout of 30%-40% of its underlying earnings after tax, but with a guaranteed minimum of €0.35 per share

Based on TUI's share price at the end of the 2019 financial year, the dividend floor would represent a dividend yield of 3.3% a year, which compares to the 4.88% yield from the dividend declared on 11 December.

Ahead of TUI’s first quarter update, Barclays Capital has repeated its equal weight investment rating on TUI and cut its price target by 10p to 850p. Goldman Sachs has initiated coverage with a sell rating and price target of 950p. Berenberg has downgraded its rating to hold from buy and also cut its price target to 950p from £12. While UBS remains neutral and has cut its price target from £10.20 to 970p.

Results are due out on Tuesday.

More on TUI

Important information: When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. Investors should note that the views expressed may no longer be current and may have already been acted upon. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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