Southwest Airlines Increases Its Dividend Right on Schedule

One of the healthiest airlines increases its dividend at an unsurprising time.

May 15, 2014 at 12:33PM

On May 14, Southwest Airlines (NYSE:LUV) boosted its dividend 50% and announced a $1 billion share buyback as the airline seeks to share some of its profits with investors. But even though airline dividends are generally small, this increase is really not much of a surprise. In fact, it followed the same course as Southwest's last dividend increase.

Airline dividends 2013
Two years ago, Southwest Airlines was the only major U.S.-based airline to pay a dividend, and even though it was only a quarterly penny per share, yielding around 0.3%, it still made Southwest the income stock of the airline industry.

But in May 2013, Delta Air Lines (NYSE:DAL) initiated a $0.06 quarterly dividend, along with a $500 million share buyback, for a yield of around 1.3%. It was no surprise Delta would be the second major airline to initiate a dividend. The airline was taking a disciplined approach to aircraft spending, slashing debt by around $5 billion since 2009, and growing profits, with even larger ones expected in the future.

Not wanting to be outdone, Southwest quadrupled its dividend the following week to match Delta's 1.3% yield. As airline profits continued to grow, Alaska Air Group (NYSE:ALK) joined the trend that summer with its own dividend alongside its share buyback program.

Airline dividends 2014
With Delta Air Lines reporting record profits, the airline increased its dividend by 50% to $0.09 quarterly and launched a $2 billion share buyback last week. Soon after this, I discussed the possibility of this triggering dividend increases at other airlines in this article, where I concluded there was a decent chance of dividend increases as part of a broader trend in growing airline profitability.

As it turns out, almost the exact same events repeated themselves this May as were seen last May. After Delta's dividend increase, Southwest effectively matched the yield, and both carriers new dividends now yield just under 1% at current share prices, the lower yield from 2013 being caused by significant share price appreciation in between.

There is one other explanation for Southwest's timely dividend increases. In both cases, the dividend increase took place at Southwest's annual shareholders meeting, which, in both 2013 and 2014, was about a week after Delta's dividend announcement. To what extent Delta's move influenced Southwest's decisions will never be known, but positive industry conditions and an investor hunger for yield create a perfect storm for dividend increases.

Boosting buybacks
For this latest capital return plan, Southwest choose to essentially match Delta's dividend increase but only launch a $1 billion share buyback compared to Delta's $2 billion buyback. While I do see Southwest as well positioned for a buyback because of its long record of profits and reasonable valuation for shares, choosing not to exactly match Delta's buyback could actually be a long-term positive.

Even though airlines are doing better, they still need to plan for a rainy day while rewarding shareholders today. While the dividend matching at Southwest can be attributed to a desire to reward investors and a need to retain as many airline income investors as possible, having a separate view on buybacks is good news for shareholders. Despite operating in the same industry, what's best for one airline may not be what's best for another. By deciding on its own level for buybacks, Southwest is showing it still has the financial discipline to run buybacks at the levels best for Southwest, and not just at levels to satisfy a buyback envy with Delta.

More dividends to come?
It's not surprising that Southwest Airlines, Delta Air Lines, and Alaska Air Group are the biggest dividend payers. All three airlines are controlling debt, reporting strong profits, and not overspending on new aircraft, making them among the most financially healthy companies in the industry.

As these three carriers continue to grow profits, and other carriers search for new ways to reward investors, airline investors should keep an eye out for more dividend increases.

Airlines are profiting from record energy production, and you can too!
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a look at three energy companies using a small IRS "loophole" to help line investor pockets. Learn this strategy, and the energy companies taking advantage, in our special report "The IRS Is Daring You to Make This Energy Investment." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Alexander MacLennan owns shares of Delta Air Lines. Alexander MacLennan has the following options: long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, and long January 2015 $30 calls on Delta Air Lines. 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 has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers