Please ensure Javascript is enabled for purposes of website accessibility

Better Buy: Delta Air Lines, Inc. or American Airlines Group Inc.?

By Dan Caplinger - Jan 23, 2016 at 10:30AM

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

Which airline is more likely to see its stock gain altitude? Find out here.


Image: Delta Air Lines.

Over the past several years, the airline industry has had its best performance in decades, and Delta Air Lines (DAL 2.69%) and American Airlines Group (AAL 2.17%) have both played monumental roles in driving the industry forward. Yet both stocks have seen declines over the past year, and investors want to know which airline stock is the better choice for their portfolios. Let's compare Delta Air Lines and American Airlines Group on several key metrics to see which looks more attractive currently.

Valuation
Both Delta and American have seen their shares lose altitude over the past year, but Delta has done a better job of keeping its declines in check. Delta shares have fallen 6% since early 2015, compared to a much more dramatic 27% drop for American over the same time period.

From a typical earnings-based valuation perspective, both American and Delta look dirt cheap. Looking at its income over the past 12 months, Delta stock trades at just eight times its trailing earnings. American is even cheaper, with its stock fetching a trailing earnings multiple of less than six.

Much of the disparity between the two stocks goes away when you look at forward estimates. American has already gotten the lion's share of benefits from falling fuel costs, and so its forward earnings multiple isn't much different from its trailing valuation. Delta, on the other hand, expects further earnings gains due to fuel cost reductions. Delta's forward earnings multiple is just over six.

Based on valuation, American arguably has a slight edge over Delta. The difference, though, is relatively small.

Dividends
Airlines have never been strong dividend payers, but both American and Delta reward their shareholders to some extent. Delta's current dividend yield is about 1.2%, and that just edges out American and its 1% yield.

Neither company has an extremely long history of paying dividends. American just emerged from bankruptcy just over two years ago, and it hasn't made any changes to the $0.10 per share quarterly dividend it started paying in mid-2014. By contrast, Delta has shown a willingness to grow its dividend payout over time, making two dividend increases over the past two years and more than doubling its payout since starting it in 2013.

By the dividend standard, Delta has an edge over American. If American thinks about a dividend increase in the near future, though, that could change quickly.

Growth
The airline industry has never seen stronger earnings growth, and both Delta and American have worked hard to take full advantage. In Delta's most recent earnings report from earlier this week, the airline reported a 50% jump in adjusted earnings per share, even though it included some charges related to closing out fuel hedges. A $700 million drop in fuel expenses year-over-year helped offset downward pressure from slight declines on the revenue side. Passenger unit revenue fell 1.6%, but many expected a larger drop. Moves to cut capacity in overserved markets helped limit declines, especially in key areas like the Pacific.

American won't report its fourth-quarter results until next week, but its most recent performance included its eighth straight quarter of record profits. A 3.9% drop in revenue didn't keep the company from posting a 55% increase in its adjusted pre-tax income that sent American's earnings per share up by two-thirds from year-earlier levels. The integration of US Airways has gone relatively well. The one disadvantage going forward is that future fuel-cost savings will rely on further drops in energy prices, because unlike Delta, American got most of its benefit from lower fuel expenses quickly because of its unhedged position.

In terms of future growth, both companies are poised to capitalize on key opportunities in their respective markets. In the near-term, Delta might grow slightly more, but American fully expects to catch up and surpass its rival in the long run.

Airlines have seen huge growth over the past several years, but changing conditions pose a threat to their upside potential. Based on these factors, American Airlines Group looks like a slightly better buy based on valuation, but Delta Air Lines also has plenty of ability to climb in the years ahead as well.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has the following options: long January 2017 $35 calls on American Airlines Group. 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.

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

Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
DAL
$33.83 (2.69%) $0.89
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
AAL
$15.06 (2.17%) $0.32

*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
377%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/08/2022.

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.