Will IAG and Rolls-Royce shares pay dividends in 2022?

It’s been a tough 18 months for jet engine maker Rolls-Royce (LSE: RR) and British Airways owner International Consolidated Airlines Group (LSE: IAG). But with air travel rapidly recovering, are these FTSE 100 stocks likely to restart dividends payments in 2022?

IAG: lifting off

In July, IAG said it expected to fly 45% of 2019 capacity during the third quarter of this year. With US borders opening up to European travellers from November, I suspect this figure will continue to rise as we head into the new year.

British Airways management seem to think so too. The airline laid off 10,000 staff last year. But recent press reports indicate that BA is planning to rehire several thousand staff to support next summer’s schedules.

By then, I think we’ll see most airlines operating fairly normally. Broker forecasts suggest that IAG will also return to profitability next year, with a net profit of €519m. In 2023, profits are expected to be close to 2019 levels.

I’m confident IAG’s business has been saved. But I don’t think the group will restart dividend payments in 2022, or possibly even 2023. The cash used to fund IAG’s dividends comes from its operating companies — airlines such as British Airways and Iberia.

A number of the loans taken by these airlines last year included restrictions on dividend payments until the loans are repaid. British Airways also agreed a deal to defer £450m of pension contributions that prevents it paying dividends to IAG before 2024.

IAG’s net debt is forecast to peak at €13.2bn this year, according to broker forecasts. That’s nearly double the €7.6bn the airline reported at the end of 2019. Until this total starts to fall, I don’t think dividends will be possible.

Indeed, I don’t think IAG shares are cheap at current levels either. Including debt, the airline group is valued at around £18bn at the moment. In October 2019, that valuation was £14bn. Is IAG really worth more today than before the pandemic? I don’t think so. I certainly won’t be buying the shares.

Rolls-Royce: a better choice for dividends?

What about Rolls-Royce? The company’s jet engine division makes most of its profit from service and maintenance charges which are linked to aircraft flying hours.

This model didn’t work last year. But it’s not broken and is already starting to deliver results again. Rolls-Royce reported an underlying operating profit of £307m for the first half of the year. The company also saw its cash outflows halve as customers started to spend more again.

CEO Warren East is also raising cash by selling off non-core parts of the business. Deals announced since August should bring in around £1.7bn. This will be used to reduce the group’s £4.9bn net debt.

East seems to be making good progress to me. I think Rolls will emerge from this crisis as a better business. Broker forecasts support this view and show profits rising from £286m in 2021 to £785 in 2023.

However, Rolls-Royce still has a lot of debt. And some of the loans taken last year include restrictions on dividend payments. Unless these can be repaid early — unlikely, in my view — Rolls-Royce will be barred from paying a dividend to shareholders until 2023.

I don’t expect a payout in 2022. But I do like Rolls-Royce. At under 150p, I would consider buying the shares for my portfolio.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.