At first, the idea would seem to be a bit of a joke. Airlines paying dividends? How could this be done in such a capital-intensive, yet not historically stable, industry? But a select few airlines pay their shareholders a dividend. Here, we will take a look at what these airline dividends mean.
Four rather different airlines
In this industry, dividend-paying is the exception, not the rule, because of the need for cash to acquire aircraft and manage debt. Nonetheless, these four airlines pay, or are about to pay, their shareholders a dividend.
| Airline | Delta Air Lines, Inc. (NYSE:DAL) | Southwest Airlines Co. (NYSE:LUV) | WestJet Airlines Ltd. (TSE:WJA) | SkyWest, Inc. (NASDAQ:SKYW) |
| Quarterly payment | $0.06 USD | $0.04 USD | $0.10 CAD | $0.04 USD |
| Annual yield | 1.33% | 1.15% | 1.78% | 1.15% |
Source: Scottrade.com.
Airline industry followers will notice that the only large-scale legacy airline on this list is Delta Air Lines, Inc. (NYSE:DAL). But when one thinks about legacy airlines, that is not too surprising. Legacy airlines are known for massive capital consumption, monstrous debt loads, and above all, bankruptcies.
But Delta Air Lines, Inc. (NYSE:DAL) has made strides to turn around the image of the legacy airline. Net debt is on target to be reduced by more than half from 2009 highs, and the airline’s decision to buy an oil refinery is expected to reduce fuel costs. As a result, Delta Air Lines, Inc. (NYSE:DAL) has launched a plan to return $1 billion to shareholders, half in the form of dividends, and half as share buybacks.
The next airline on the list is Southwest Airlines Co. (NYSE:LUV), an airline that has never sought bankruptcy protection and is currently approaching 40 straight years of profitability. With a dividend of $0.04 per quarter, few investors would be buying Southwest for the income, but the airline’s move to increase that dividend from $0.01 per quarter on May 15th of this year reflects Southwest’s desire to provide shareholder returns, and is closer to the dividend declared by Delta Air Lines, Inc. (NYSE:DAL).
Perhaps the closest airline to Southwest Airlines Co. (NYSE:LUV) would be Canada’s WestJet, which offers one of the highest dividends in the airline industry. As the name implies, WestJet did most of its early flying in Western Canada, but has since expanded east, targeting the Toronto City Airport as its next destination. Despite all of this expansion, WestJet still pays a dividend to its investors, most of whom are satisfied with the multibagger returns the stock has generated over the last decade.
SkyWest is one of those airlines that you have probably flown on and not even known it. It operates regional flights for major carriers, and uses those carriers’ names on the planes.
But SkyWest is able to use this position to generate a small dividend for shareholders, on par with those of the other dividend-paying airlines. While there has been some criticism of regional carriers branding themselves to appear like the major airlines themselves, SkyWest’s position is unlikely to go away, since the major airlines will still need it to feed passengers into their networks.
Show of financial strength
For many investors, dividends are a sign of stability and allow dividend-only funds to purchase the stock. Delta Air Lines, Inc. (NYSE:DAL), Southwest Airlines Co. (NYSE:LUV), WestJet, and SkyWest all want to show investors that they are more stable than their industry makes them appear.
Even though the dividends paid by these airlines are not enough to fulfill the role of an income stock, they still establish these airlines as more financially sound and shareholder-friendly. Those who are interested in airlines can now consider dividends as part of their airline selection criteria, something not normally connected with this industry.
Alexander MacLennan owns shares of Delta Air Lines and Air Canada. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool recommends Southwest Airlines.
The article Dividends From the Sky originally appeared on Fool.com.
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