Major Airlines Bump Up Dividends: More Hikes on the Way?

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It was not too long ago that stocks in the airline space were struggling on the financial front, many of them even filing for bankruptcy protection. Airlines were struggling to stay afloat in the early part of the century, grappling with issues like high fuel costs, among others. Moreover, the U.S. terror attacks in Sep 2001 dealt a severe blow to airlines. To deal with such adverse factors, airlines resorted to cost-cutting measures like headcount reduction.

Gloomy Backdrop

Given this gloomy background, it is no surprise that big players in the space like Delta Air Lines DAL had filed for bankruptcy. The Atlanta, GA-based company had slipped into bankruptcy in 2005 and eventually managed to come out of it following its merger with Northwest Airlines. United Airlines had also filed for bankruptcy in 2002. The company in its current form -- United Continental Holdings UAL -- was formed in 2010 following the merger of United Airlines and Continental Airlines.

Meanwhile, American Airlines had filed for bankruptcy in 2011. The subsequent merger of AMR (American Airlines' parent group) and US Airways in 2013, which resulted in the formation of American Airlines Group AAL , proved advantageous.

Oil Price Dip: A Godsend

The outbreak of the deadly Ebola virus in 2014 hurt stocks immensely in the airline space. However, Ebola-related fears subsided gradually and this coincided with the free fall in oil prices . With costs associated with fuel being one of the most significant expenses for airlines, soft crude prices have resulted in massive savings for carriers, thereby boosting their financial health. Naturally, this caused a massive rebound in the fortunes of airline stocks helping carriers like American Airlines and Delta Air Lines, which had filed for bankruptcy protection not too long ago, rake in huge profits.

The current financial prosperity in the airline space has prompted carriers to pay out dividends apart from engaging in activities like share buybacks and sharing of profits. Earlier this year, employees of Delta Air Lines received the highest payout in the history of corporate profit sharing programs. Low-cost carrier, Southwest Airlines LUV made its highest profit sharing payment ($620 million) this year.

American Airlines, which was earlier opposed to profit sharing, reversed its stance and embraced the scheme in Mar 2016. The much-improved balance sheets of the airlines have also seen a surge in buybacks.

Uptick in Dividend Payouts

The massive savings due to cheap oil has led to major players in the space paying healthy dividends to its shareholders, a development which did not seem feasible in the days of financial crisis for carriers.

In 2015, Delta Air Lines raised its cash quarterly dividend to 13.5 cents per share (54 cents per share annualized), representing an increase of 50% over the previous payout of 9 cents per share. Last year, Southwest Airlines too raised its quarterly dividend. The payout was increased 25% to 7.5 cents per share (30 cents per share annualized). The trend of hiking dividends continued with the Seattle, Washington- based Alaska Air Group, Inc. ALK announcing in Jan this year a 38% hike in its quarterly dividend to 27.5 cents. SkyWest, Inc. SKYW too announced a 25% increase in its quarterly dividend payout earlier this year.

Will More Hikes Follow?

With oil unlikely to touch the highs witnessed in mid-2014 any time soon, airlines are expected to maintain the healthy run going ahead. Despite the recent rally, crude prices have been hovering around the $45 a barrel mark. This represents a significant decline from the approximately $105 per barrel in Jul 2014.

The encouraging 2016 profitability forecast issued by the International Air Transport Association (IATA) further justifies our bullish stance on airline stocks. The trade association expects the airline industry to register profits of $36.3 billion in 2016 with a net profit margin of 5.1%. That airline companies have witnessed a turn of fortunes as oil began to sink mid-2014 onward can be made out from the fact that IATA's 2016 profit projection is more than double the $17.3 billion achieved in profits in 2014.

Given this encouraging backdrop, we expect dividend hikes to continue in 2016. For example, Delta Air Lines, which made a whopping $5.9 billion in pre-tax profit in 2015, is a prime candidate to raise its dividend payout this year. The likes of Southwest Airlines may also follow suit. Whatever be the final outcome we expect investors in the airline space to stay focused on this burning issue.

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SOUTHWEST AIR (LUV): Free Stock Analysis Report

DELTA AIR LINES (DAL): Free Stock Analysis Report

SKYWEST INC (SKYW): Free Stock Analysis Report

ALASKA AIR GRP (ALK): Free Stock Analysis Report

UNITED CONT HLD (UAL): Free Stock Analysis Report

AMER AIRLINES (AAL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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