Air Canada shares stuck on the tarmac, but bank dividends set for takeoff

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I bought Air Canada (AC) shares in 2021 at $33 per share, hoping for capital gains. As you know, the shares keep on falling. Is there any hope of recovering my investment? Should I take a loss rather than hang on?

You probably don’t need to hear this, but airlines are notorious for separating investors from their money. Not only are they prone to boom-bust cycles, but they face a multitude of other risks including volatile fuel prices, high debt loads, geopolitical shocks and competition that can range from intense to irrational.

Sure, if you catch them at the right time, airlines can deliver hefty gains. From the start of 2017 through the end of 2019, Air Canada’s shares soared more than 250 per cent. But then COVID-19 hit, and the shares came in for a hard landing. Somewhat perplexingly, they have remained grounded for the last few years, despite a strong rebound in air travel since pandemic restrictions were lifted.

In the third quarter, Air Canada’s operating revenue surged 19.2 per cent to $6.3-billion and its operating income more than doubled to $1.4-billion. Yet, if the moribund stock price is any indication, investors remain concerned about the airline’s rising labour and fuel costs, its $5.4-billion net debt load and the potential for higher interest rates to cause a slowdown in the economy in general, and air travel in particular.

Yet another concern cited by analysts is that Air Canada’s capital spending is projected to increase by $4.4-billion in 2025 and 2026 as it adds 18 Boeing 787-10 Dreamliners to its fleet. This will “substantially reduce” Air Canada’s free cash flow, Walter Spracklin, an analyst with RBC Dominion Securities, said in a note following the release of the company’s third-quarter results on Oct. 30.

Mr. Spracklin cited other challenges including increased competition, a potential drop in discretionary spending because of high interest rates and the prospect of sharply higher labour costs. The union representing Air Canada pilots is expected to seek big wage gains in its current contract negotiations, in line with the double-digit pay increases won by pilots at rival WestJet Airlines and several U.S. carriers.

With all of these factors expected to weigh on the stock, Mr. Spracklin reduced his price target on the shares to $17 – the lowest on the Street – from $21 and maintained his “sector perform” rating. Air Canada’s shares closed at $18.11 on Friday.

Now for the good news: Not every analyst is as pessimistic as Mr. Spracklin.

“The bears’ argument would be that the strong Q3 was yesterday’s news with the market concerned about the weaker demand trends moving forward, impact from the global conflicts, and higher energy prices,” Kevin Chiang, an analyst with CIBC Capital Markets, said in a note to clients.

But Mr. Chiang sees a “disconnect” between AC’s sluggish share price and its business fundamentals.

“Near-term demand trends are proving to be more resilient than feared while the increase in capex, which should have been expected given the 787-10 [order] announcement back on September 25, does not jeopardize AC’s balance sheet,” Mr. Chiang said.

From a valuation standpoint, the shares are attractive, he said. He rates the stock “outperformer” and has a target price of $30 – just above the average analyst target of $29.57, according to Refinitiv data.

Ultimately, you’ll have to decide if you’re willing to hang on for a rebound that may or may not materialize. If you believe that all of the bad news is already baked into Air Canada’s stock price, and if you can be patient, staying the course might be a prudent move as the downside from here may be limited.

On the other hand, one benefit of selling now is that – assuming you hold your shares in a non-registered account – you’ll be able to claim a capital loss that you can use to offset capital gains. If you don’t have any capital gains in 2023, you can carry your capital loss backward up to three years, or forward indefinitely, to offset capital gains in other years. By selling now, you can also deploy the proceeds into a stock with an outlook that isn’t clouded by so many uncertainties.

When faced with such a dilemma, it often helps to ask yourself: If you didn’t already have a position in the stock, would you buy it today? If the answer is yes, then hanging on may be the right move. If the answer is no, then selling is probably the better choice.

Do you expect that any banks will raise their dividends before the end of the year?

Yes, there will likely be some dividend increases. But don’t expect any huge raises, given concerns about a potential recession and the banks’ rising provisions for credit losses and slowing loan growth.

Desjardins Securities predicts the Big Six banks will raise their dividends by about 3 per cent, on average, when they report fourth-quarter results in late November and early December. Specifically, it expects that Toronto-Dominion Bank (TD) will hike its dividend by 5 per cent, with Bank of Montreal (BMO), Canadian Imperial Bank of Commerce (CM), National Bank (NA) and Royal Bank (RY) each raising their payouts by about 3 per cent. The only big bank not expected to raise its dividend is Bank of Nova Scotia, which typically reviews its dividend when it posts second-quarter results in May.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.