Please ensure Javascript is enabled for purposes of website accessibility

Why Copa Holdings' Dividend Looks Like a Multiyear Winner

By Andy Gould - Updated Apr 5, 2017 at 11:03AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This Latin American airline pays a decent dividend today, which looks set to rise over the coming years.

What's the only thing better than a rising stock that delivers a reliable dividend? How about a dividend that rises along with the share price?

I think that's the most likely scenario we're looking at with Latin American airline Copa Holdings (CPA -2.29%), which currently pays a 1.8% dividend on a stock that's trading at two-year highs. But what's really appealing is that this dividend should begin to increase as Copa's business continues to recover from what has been a very tough couple of years.

CPA Chart

CPA data by YCharts.

A steady dividend payer even during its worst days

For a long stretch, Copa's stock seemed to defy gravity -- growing from around $30 in 2009 to over $160 in late 2013. The party ended shortly thereafter, when economies in some of its most important markets -- notably Brazil, Colombia, and Venezuela -- began to weaken, causing passenger demand to drop dramatically. As a result, in 2015 and 2016, Copa suffered from falling revenue, weaker operating margins, and lower net income.

While the company's stock fell all the way back into the $40s, Copa's dividend during this difficult time was at least a little more stable -- paying $0.84 per quarter in 2015 and $0.51 per quarter in 2016. And the company has already declared it is holding its dividend steady for 2017 at $0.51 per quarter.

A Copa Airlines plane flying above the clouds

Image source: Copa Holdings. 

Management appears to be looking out for shareholders

Copa's dividend policy is to pay out 40% of the prior year's annual net income in equal quarterly installments. One benefit of this is that at the conclusion of the year, shareholders know what their dividend payments for the following full year will be.

However, it's also worth noting that management has made a couple of adjustments to this formula recently -- both of which were in shareholders' favor. First, in late 2015, Copa tweaked its payout policy so that it paid out 40% of the previous year's adjusted net income, rather than simply reported net income. This insulated shareholders from the effects of a large, one-time Venezuelan currency translation and transactional loss that resulted in negative net income for that year, allowing the company to still pay a dividend in 2016.

Second, after announcing its full-year 2016 results, the company decided to go slightly above the 40% payout figure so it could maintain its dividend at $0.51 per share throughout 2017. Given the company's solid financial position (a net debt-to-EBITDA ratio of 2.2, the lowest in Copa's peer group), this seems like another smart, shareholder-friendly gesture.

A dividend that should rise next year -- but by how much?

Even during the darkest days of 2015 and 2016, Copa managed to redeploy some of its capacity from low-demand routes to high-demand routes while keeping its costs in check, allowing it to post operating margins of around 12%. And although the stock certainly suffered, the business performed admirably under the circumstances. For these two years, holders of the stock continued to collect a dividend yield of at least 2%.

Only recently has Copa's yield dipped below that threshold, owing to its share price rising dramatically again as investors cheer the company's rising prospects. Copa has already returned to positive revenue growth, and passenger counts have now risen for five consecutive quarters. As local economies continue to stabilize across Latin America, management's outlook for 2017 is much improved: The company is guiding for mid-single-digit capacity growth, as well as higher revenue per available seat mile (RASM) and higher operating margins back near its historical norms. With the lowest unit costs of any of the major airlines in its markets, the company appears to be in a very good position.

With the wind now seemingly at Copa's back, analysts, on average, are currently predicting earnings per share of $7.67 in 2017 and $8.64 in 2018. Under the company's current dividend policy, those figures would result in quarterly dividend payments of $0.77 in 2018 and $0.86 in 2019, compared to the $0.51 quarterly dividends being paid out this year. That sounds like a very attractive outcome to me, particularly if Copa's business continues to rebound in a big way, resulting in further share price appreciation as well.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Copa Holdings, S.A. Stock Quote
Copa Holdings, S.A.
CPA
$62.36 (-2.29%) $-1.46

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
336%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.