Marshall Hargrave: Airline stocks aren’t known for their robust dividends, but industry consolidation is making the airline sector a must-own.
It’s no surprise that airlines are the biggest benefactor of lower oil prices. The No. 1 expense for airlines is fuel.
Even with the Ebola scare, the airline index is flying. The NYSE Arca Airline Index is up 33% year-to-date, compared to the S&P 500 that has gained just 10%.
The airline industry is shaping up to be a great long-term investment.
Every penny per gallon fall in the price of fuel for airlines saves the industry nearly $200 million, according to industry group Airlines for America. Newer fleets of fuel-efficient planes are also cutting fuel costs for the carriers.
The recent fall in oil prices isn’t the only positive.
Consumers have more money in their pockets heading into this holiday season than in recent memory, thanks to lower gas prices and higher employment. This should help promote a higher level of airline travel over the few months.
Airlines are also more disciplined now than just a few years ago. With consolidation, the remaining airlines have reduced capacity and are keeping airfare prices high — which is good for profits.
Additional fees, such as baggage fees and in-flight food, are also driving the top line for airline stocks. IdeaWorks/CarTrawler expects ancillary airline revenue to be up 17% in 2014.
With all this, we have a perfect storm for the airline industry. Revenues are rising thanks to the ability to raise fares and keep them there. And thanks to rising employment and lower gas prices, consumers have more money to spend on travel.
Here are the five dividends in the airline industry:
No. 1: American Airlines Group Inc. (NASDAQ: AAL)
American Airlines offers a 0.9% dividend yield. It’s also very cheap, trading a forward P/E ratio (price-to-earnings ratio based on next year’s earnings estimates) of just 6. Over the summer it started paying a dividend and announced plans to buy back $1 billion in shares. Last quarter, American Airlines posted the highest profit in its history.
The airline still has a lot of potential to grow profits as it works toward its $1.4 billion synergy (cost saving) target thanks to the U.S. Airways merger. Those types of savings and industry tailwinds should mean another dividend boost and more buybacks in 2015.
No. 2: Delta Air Lines, Inc. (NYSE: DAL)
Delta Air Lines pays a 0.8% dividend yield. Its stock is also reasonably priced, trading at a forward P/E ratio of 11. Delta Air Lines is one of the industry’s leaders thanks to its 2008 merger with Northwest Airlines, which is all but fully complete. It also has a relatively low debt and is generating an impressive level of cash flow already.
Delta Air Lines is one of the leaders in returning capital to shareholders. It implemented a dividend last year and back in May it upped its buyback plan to $2 billion; those buybacks are to be completed by the end of 2016.