Is Delta Air Lines' Dividend for Real?

Delta Air Lines (NYSE: DAL  ) has come a long way in a very short time, reversing years of huge losses to put itself in position to post its fourth-straight annual profit. While rivals United Continental (NYSE: UAL  ) and US Airways (NYSE: LCC  ) have seen similar rebounds in adjusted net income, Delta is the only one of the big-four legacy carriers that has started paying a dividend to shareholders. Does Delta's modest payout mark the beginning of a trend by more airlines, or will Delta become the sole dividend giant among its peers?

Delta Air Lines announced in May that it would return $1 billion to shareholders, with a portion of that amount going toward instituting a quarterly dividend. The first dividend payment arrived in shareholders' accounts last month, and Delta recently declared its second dividend to take place in December. But with the changing whims of the airline industry, should dividend investors count on Delta going forward? Let's take a closer look at Delta Air Lines and its prospects for dividend growth in the future.

Dividend Stats on Delta Air Lines

Current Quarterly Dividend Per Share

$0.06

Current Yield

0.9%

Payout Ratio

10%

Source: Yahoo! Finance.

How Delta's dividend could fly higher
Delta has ridden a wave of favorable industry trends to huge profits in recent years. The airline's third-quarter report provides a good snapshot of those positive factors, including substantial jumps in passenger revenue per available seat mile both domestically and in its trans-Atlantic market. Fuel costs fell below the $3 per gallon mark, contributing to solid overall cost containment for the airline. All told, those factors added up to 29% growth in earnings for Delta during the quarter.

In that light, Delta's dividend looks ridiculously small. Paying out less than 10% of its earnings over the past year, Delta has a dividend yield of less than 1%. Yet even that modest payout puts Delta among the cream of the crop among airline dividends, with longtime payers Southwest Airlines and Alaska Air Group also sporting yields of about 1%.

What's holding Delta's dividend back?
Yet Delta and its airline peers still have a lot of work left to put their past financial troubles behind them. Even with its recent profits, Delta still has $10.1 billion in long-term debt on its balance sheet. United Continental is in the same league at $10.2 billion in long-term debt, while US Airways' smaller $5.5 billion looks more ominous when you consider that the carrier brings in less than half the revenue of United or Delta.

Dividend investors also have to understand the risk of quick reversals of fortune that the airline industry has notoriously wrought on shareholders in the past. Even AMR's (UNKNOWN: AAMRQ.DL  ) American Airlines has turned profitable under bankruptcy protection, but bankruptcies have consistently punctuated the sector's ups and downs since 2000. That has created skepticism among investors who've been burned once too many times by airline stocks.

The future for Delta's dividend
When Delta first announced its dividend plan, CEO Richard Anderson noted that Delta's strategy has resulted in a solid financial foundation for the company, and it's clear the airline doesn't want to jeopardize that firm footing going forward. Delta's broader plan includes continuing to cut debt, increasing contributions to its defined-benefit pension plan, reinvesting capital in fleet modernization and facility improvement, and maintaining share buybacks.

As a result, investors shouldn't count on big increases in dividends coming soon. In the long run, though, if Delta achieves all of its other financial goals, it could divert more of its future profits toward higher payouts without jeopardizing its hard-won success.

Why Delta's dividends really matter
Why are investors excited about Delta and its dividend? Because of one simple truth: dividend stocks can make you rich. Over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

Click here to add Delta Air Lines to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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  • Report this Comment On October 30, 2013, at 8:28 PM, ferdiefor wrote:

    Hope not. Would rather see LCC buy in undervalued shares rather than pay dividends.

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