Southwest Airlines Increases Its Dividend Right on Schedule

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.

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