3 Airlines Are Fighting to Be the Most Generous -- to Shareholders

Delta Air Lines, Alaska Air, and Southwest Airlines are all trying to draw investors' attention by returning lots of cash to shareholders.

May 17, 2014 at 10:15AM

After years of hoarding cash to protect against the dual threats of recession and skyrocketing fuel prices, a few airlines finally began to reward shareholders last year. Delta Air Lines (NYSE:DAL) and Alaska Air (NYSE:ALK) instituted new dividends in May and July, respectively. Meanwhile, Southwest Airlines (NYSE:LUV) quadrupled its dividend to keep up with Delta.

All three companies have also been actively repurchasing stock to boost their earnings per share. In the race to be the most generous to their shareholders, Delta, Alaska, and Southwest have all rolled out bigger capital return programs this month.

Big money at Delta
Delta Air Lines probably made the biggest splash of any airline by announcing a plan to return $2.75 billion to shareholders in the next two years. First, Delta will increase its quarterly dividend by 50% to $0.09 as of September. Second, Delta plans to spend $2 billion on buybacks between now and mid-2016.


Delta just announced plans to return $2.75 billion to shareholders by mid-2016.

It's tricky to evaluate the impact of share repurchase programs in advance because the company is under no obligation to follow through on its stated plans. However, Delta shareholders can be fairly confident that Delta will do what it says -- or more.

After all, a year ago, Delta told investors that it planned to spend $500 million on buybacks over the next 3 years. Today, the company is on the verge of completing that buyback two years early! In addition, Delta is on track to generate about $3 billion in free cash flow, providing plenty of cash to support its buyback plans.

Southwest responds
Last year, Southwest quickly responded to Delta's capital return program by quadrupling its own dividend. This year, Southwest waited just a week after Delta's announcement to dramatically boost its own dividend and share buyback plan.


Southwest Airlines is following Delta again with a big increase in its dividend and buyback plans

Like Delta, Southwest is raising its quarterly dividend by 50% this year (from $0.04 to $0.06). Southwest is also ramping up its buyback plans. Southwest recently completed its existing share repurchase program, and its board has authorized another $1 billion in share buybacks.

Southwest didn't put a time frame on its share repurchase activity, but like Delta it has a strong track record of following through on share repurchase announcements. Since August 2011, Southwest Airlines has returned $1.7 billion to shareholders, primarily through buybacks. In fact, Southwest already began a $200 million accelerated share repurchase to kick off its new buyback program.

Southwest has plenty of financial capacity to complete its $1 billion share repurchase. At the end of last quarter, the company had about $3.5 billion in cash and short term investments available, which is probably more liquidity than an airline of Southwest's size needs.

Last, but not least
Alaska Air has not been left out in the most recent flurry of airline capital return programs. Earlier this week, it announced a new $650 million share repurchase authorization. While this is smaller than the Delta and Southwest buyback programs on an absolute dollar basis, it's actually the biggest one when adjusting for size or market cap.


Alaska Air also unveiled a large share buyback program last week.

At current market prices, $650 million would be enough for Alaska to retire 10% of its shares. Alaska has plenty of flexibility to execute that level of share repurchase in the next 2 years or so. Alaska Air had more than $1.3 billion of cash and short-term investments on its balance sheet at the end of 2013. Furthermore, the company expects to generate at least $300 million of excess cash in 2014.

Foolish final thoughts
As three of the most successful airlines in the U.S., Delta Air Lines, Southwest Airlines, and Alaska Air have delivered big gains for shareholders in the past few years. However, today their shares look more expensive than those of some rivals with less consistent profitability track records.

Some investors would prefer to take the risk of betting on a cheaper airline stock -- in the hope that it will eventually catch up to the industry leaders. While Delta, Southwest, and Alaska can't offer investors cheap stock prices anymore, they do share one big advantage over less successful rivals; they are generating lots of excess cash!

This allows Delta, Southwest, and Alaska to satisfy shareholders through bigger dividends and buybacks: something that weaker rivals can't afford. As long as airline profits continue to soar, investors should expect more aggressive moves by these companies to stand out from the crowd through generous dividends and share buybacks.

Warren Buffett just bought nearly 9 million shares of this company
Imagine a company that rents a very specific and valuable piece of machinery for $41,000 per hour. (That's almost as much as the average American makes in a year!) And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report details this company that already has over 50% market share. Just click here to discover more about this industry-leading stock, and join Buffett in his quest for a veritable landslide of profits!

Adam Levine-Weinberg and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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