Airline investors have been well rewarded in 2013 by the hard work undertaken by airline management teams over the last three years to position the industry for long-term profitability. Airline executives have by and large done a good job containing unit cost growth and growing unit revenues in the face of skyrocketing fuel prices, boosting financial returns.
With a more stable financial outlook, many airlines have started to think about returning some cash to their long-suffering shareholders. On Thursday, Alaska Air (NYSE: ALK ) became the latest airline to initiate a regular dividend. It will make its first dividend payment of $0.20 per share on August 22.
This decision provides further evidence that the company's management team is committed to returning excess cash to shareholders and keeping capex disciplined. It also demonstrates their confidence that Alaska Airlines will remain consistently profitable, as it has been since 2010.
Three airline dividend leaders
The only airline to maintain a dividend throughout the Great Recession was Southwest Airlines (NYSE: LUV ) , which has consistently had one of the best balance sheets in the industry. But, for many years, Southwest's quarterly dividend was a paltry $0.01 per share, which left the company's yield below 0.5%.
In the past year, Delta Air Lines (NYSE: DAL ) has really led the charge in terms of returning cash to shareholders more aggressively. The company told investors late last year that its board of directors was evaluating ways to return cash to shareholders and expected to have a decision by mid-2013. In May, Delta announced that it was beginning a $0.06 per share quarterly dividend and a $500 million share repurchase program.
Based on Delta's share price before the announcement, the dividend yield would have been approximately 1.4%, far outstripping Southwest's dividend. However, Southwest quickly shot back by quadrupling its dividend, giving its investors a comparable yield. After Southwest's announcement, many investors began to speculate about which airline would be next to initiate a dividend.
In some ways, it's not very surprising that Alaska was the third major airline to begin a dividend. The company already had a robust share repurchase program, and has spent more than $370 million to buy back shares since 2006, creating substantial value in the process. Alaska is also in the middle of a $250 million share repurchase program that it plans to complete by the end of 2014.
Based on Alaska's recent trading price, its dividend yield is approximately 1.4%, similar to the Delta and Southwest dividend yields. At this level, the dividend is symbolic more than anything else; Alaska's share repurchase program is returning significantly more value to shareholders. However, the symbolism is still important. Many savvy investors focus on investing in companies that pay a regular dividend, because regular dividends are the surest sign of a shareholder-oriented management team.
Foolish bottom line
So far, 2013 seems to be the year when the highest-quality major airlines are separating themselves from the pretenders. Delta, Southwest, and Alaska are among the most consistently profitable airlines in the industry. This has given all three the flexibility to pay regular dividends that are modest, but not insignificant. By contrast, most of their competitors have a lot of work to do to gain the financial strength and predictability of earnings necessary to commit to a long-term quarterly dividend program.
Airlines are beginning to embrace regular dividends, but companies in other industries frequently offer much higher yields. Which should you choose? If you're an investor who prefers returns to rhetoric, you'll want to read The Motley Fool's new free report: "5 Dividend Myths... Busted!" In it, you'll learn which stocks provide premium growth and whether bigger dividends are better. Click here to keep reading.