Ryanair’s mould-breaking strategy pays dividends

By Angus McCrone, The CA Magazine

7 February 2019

There is only one thing in the world worse than being talked about, and that is not being talked about. However, that Oscar Wilde quote, from The Picture of Dorian Gray, is not one that should worry investors in Ryanair, and its high-flying dividend policy.

Air travellers usually have plenty of things to say about their experiences with the airline that sports the motto “Low Fares. Made Simple.” As if that was not enough, the outspoken remarks of its Chief Executive, Michael O’Leary, will always keep tongues wagging.

Here are a couple of my favourite examples:

  • “Our booking engine is full of passengers who have sworn they will never fly with us again.”
  • “Are we going to say sorry for our lack of customer service? Absolutely not.”

Since its humble beginnings in the mid-1980s with a solitary Embraer 15-seater flying between Waterford and Gatwick Airport, Ryanair has had a big impact on air travellers – via rock-bottom fares and no-frills service – and on the airline industry.

It has done so by, among other things, “dynamic pricing”; single-minded standardisation on short-haul routes; and through the use of one aeroplane model, in the last 20 years the Boeing 737–800, fully owned rather than leased.

One thing that marks out Ryanair as unusual is its dividend policy. It has no regular payout, so boasts no dividend yield to provide a part of its share price, instead delivering a return to shareholders via buyback programs and occasional, large special dividends.

Less conspicuously, it also provides food for thought – without extra charges – for corporate finance and the City. Even though its shares slipped by nearly a half between a peak in August 2017 and the start of this year, they were still up 15-fold since 1999 and three-and-a-half-fold since 2011. That gave Ryanair a market capitalisation of €12bn at the turn of this year.

One thing that marks out Ryanair as unusual for a leading listed company in the British Isles is its dividend policy. It has no regular payout, so boasts no dividend yield to provide part of the underpinning for its share price.

Instead, it delivers a return to shareholders via a mixture of heavy buyback programmes (totalling €800m in 2017/18 alone) and occasional, large special dividends, the last one of which was nearly four years ago.

Then there is the degree of reliance on Michael himself. He is the only executive on the 12-strong board, most of the 11 non-executives being prominent members of the Irish business community. The rest of the “executive officers”, including its Chief Financial Officer and Chief Operating Officer, do not sit on the board.

According to the 2018 annual report, “the company determines and presents operating segments based on the information that internally is provided to Michael O’Leary, CEO, who is the company’s chief operating decision maker.”

A final distinguishing feature of Ryanair compared with many other large quoted companies in the City has been its willingness to nail its colours to the mast on Brexit.

There is also the benefit that a low tax rate provides. The company says most of its profits are subject to Irish corporate tax at 12.5%. In fact, in fiscal year 2017/18, the actual tax rate on its profits was just 10%.

That enables Ryanair to plough tens of millions of euros a year extra back into capital spending, mainly the purchase of new aircraft. This is money that would otherwise go to the state in a jurisdiction with a higher corporation tax rate.

Arguably, Ryanair is also an interesting case study of a business that makes its money on extras, rather than on its core activity. In 2017/18, it had an average booked passenger fare of €39.40, but a cost per booked passenger of €42.08.

Yet it reported an operating margin of 23%. The explanation is that it also made “ancillary revenues” of €15.48 per booked passenger, including reserved seating, priority boarding, car hire, travel insurance and hotels.

A few days before the 2016 referendum, Michael appeared on a TV interview dressed in a suit that was one half Union Jack and one half European Union flag.

A final distinguishing feature of Ryanair compared with many other large quoted companies in the City has been its willingness to nail its colours to the mast on Brexit.

A few days before the 2016 referendum, Michael appeared on a TV interview dressed in a suit that was one half Union Jack and one half European Union flag.

More recently, it has been tough-talking on what might happen were the UK to crash out of the EU with no deal on 29 March. Its annual report states that, in this eventuality, “…it is likely that the company’s UK shareholders will be treated as non-EU and this could potentially affect Ryanair’s licensing and flight rights. Accordingly, in line with the company’s Articles of Association, Ryanair may restrict the voting rights of all non-EU shareholders.”

Topics

  • CA Magazine
  • Business
  • Brexit

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