The airline industry is not normally one associated with big dividends but two carriers are paying dividends that rival the best of income stocks. Here I discuss these two airlines and how they differ from traditional low-yield airlines.
A Chorus of dividends
Chorus Aviation (TSX:CHR.B) has been a volatile stock over the past several months as investors looked toward an arbitration ruling in Chorus' ongoing dispute with Air Canada (TSX:AC.B). Shares of Chorus were hit hard earlier this year when the airline cut its dividend in half as uncertainty around the ruling lingered.
In contrast to the drop earlier in the year, the past few weeks have been highly positive for Chorus shareholders. Chorus won its dispute with Air Canada and, in response, hiked its dividend by 50%. Although the dividend it still below where it was at the beginning of the year, shares of Chorus have regained some ground as a large amount of uncertainty has been lifted and future cash flows are projected to be stronger.
The dividend yield on Chorus shares now sits above 10% and the airline's CEO, Joseph Randell, said in a statement that even at this dividend level Chorus can manage debts and make capital investments. In contrast, SkyWest (NASDAQ:SKYW) pays a dividend of just above 1% and Republic Airways Holdings (NASDAQOTH:RJETQ) does not pay a dividend. Both of these carriers operate regional flights for major airlines as well but retain a higher percentage of earnings than Chorus.
While Chorus' dividend is certainly unique in an industry where 1%-2% dividends are considered high, the carrier does face risks from Air Canada choosing other regional operators. And with Air Canada being the source of over 99% of Chorus Aviation's revenue, Chorus would find itself in a rough place if Air Canada shifted a significant amount of its business away. An agreement between Air Canada and Chorus will keep Chorus flying many Air Canada flights until 2020. With the time in between, Chorus can work on cutting costs to make itself more competitive with rivals as well as attempting to diversify its revenue stream away from Air Canada.
After getting into serious trouble several years ago, Air New Zealand (NASDAQOTH:ANZFF) is posting solid profits again as the majority government-owned airline moves along its path to recovery. In November, the government sold 20% of the airline lowering its stake from 73% to 53%.
Recently, Air New Zealand has been paying a significant, albeit, inconsistent dividend. Payments for 2013 were NZ$0.08 per share (US$0.07). With shares trading at NZ$1.63 (US$1.34), the trailing dividend yield is nearly 5%.
Air New Zealand paid a higher dividend for 2013 than in the recent past largely due to the economy's and the airline's recoveries. But it is also important to note that despite the increased payment, Air New Zealand's payout ratio has dropped from 85% to 49%. Over the next several years, the airline plans to upgrade its fleet and this reduction in the payout ratio continues to reward shareholders while satisfying the airline's capital needs.
Although forecasting this airline's dividend is difficult, it would be reasonable to see a slight bump in the payout if results continue to improve. Additionally, the continuing recovery at Air New Zealand should boost shares if results live up to expectations.
Shares of Air New Zealand are traded over the counter in the U.S. but have a low volume and typically a large spread. While long-term holders could counter this issue with enough patience or an investment time frame that would balance out the higher ask price, those looking for the more liquid version should see if they can buy the New Zealand listed shares. This is available at Fidelity and is likely available at other brokerage firms as well although some firms charge a higher commission than standard trades.
Airlines are capital intensive businesses often accompanied by high debt levels. But Chorus Aviation and Air New Zealand offer some of the highest dividend yields in the industry. Investors not impressed by the 1% yields in the U.S. market may want to look internationally at these two carriers. Although not without risks, these two carriers can serve to diversify an airline investor's portfolio internationally while adding more income than seen at most other airlines.
Alexander MacLennan owns shares of Air Canada. 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.