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Will American Airlines Raise Its Dividend in 2016?

By Dan Caplinger - Jan 23, 2016 at 8:10AM

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Even though the airline just emerged from bankruptcy a couple years ago, it has already started returning capital to its investors.


Image source: American Airlines.

It's hard to believe how much has happened with American Airlines Group (AAL -3.34%) over the past few years. In 2011, former parent company AMR filed for bankruptcy protection along with its operating subsidiaries, seeking to maintain its business operations while restructuring its cost and debt structure in order to assure its long-term viability. In late 2013, American emerged from bankruptcy and merged with US Airways to create the airline with the largest fleet of aircraft in the world. Thanks to the unprecedented strength of the airline industry, American prospered and started paying a modest dividend in mid-2014, joining Delta Air Lines (DAL -2.49%) and Southwest Airlines (LUV -2.53%) among the ranks of dividend payers in the business. Yet some wonder if American should pay even more. Let's look more closely at American Airlines to see whether a dividend hike is in the cards for 2016.

Dividend stats on American Airlines Group

Current Quarterly Dividend Per Share

$0.10

Current Yield

1%

Payout Ratio

6%

Last Increase

July 2014

Data source: Yahoo! Finance. Last increase refers to ex-dividend date.

Quickly joining the dividend-paying ranks
American Airlines is an unlikely dividend stock, if only because its bankruptcy is the most recent among major airlines. You'd think that the company might have delayed initiating a dividend until putting together more than a few months of a track record after its merger, especially because US Airways didn't pay a dividend, either. Indeed, rival Delta Air Lines didn't pay a dividend until mid-2013, and within the industry, Southwest is the biggest player to have a consistent long-term history of dividend payments to shareholders.

Nevertheless, American didn't hesitate to make its move, and the $0.10 per share quarterly dividend came as part of a huge capital deployment program. The airline paid down more than $2.8 billion in debt and aircraft lease obligations, created a $1 billion share repurchase program, and contributed $600 million in additional pension contributions. American noted that it was the first time the airline had paid a cash dividend since 1980, reminding investors of just how tough the past few decades have been for the industry overall.

Since then, the situation for American has become even more favorable. Unlike Delta and Southwest, American chose not to hedge its fuel costs, and that has resulted in the airline getting the full benefit of the plunge in energy prices that the market has seen over the past year and a half. That in turn will give the company some flexibility in structuring its dividends for the future.

Still, shareholders shouldn't get too excited about the prospects for a higher payout. American still has substantial amounts of debt outstanding, and continuing to pay those obligations down would put the airline in a much better position to weather the next cyclical downturn in the industry whenever it comes. In addition, American is working to upgrade its fleet in order to make it more efficient, reducing operating and maintenance costs, and the company hopes to use some of its fuel-cost savings toward accelerating its fleet improvements.

Will American's dividends gain altitude?
Even by industry standards, American's dividend is about as stingy as it gets. The company pays only about 6% of its earnings out to investors in the form of dividends, and even if the climb in earnings from lower fuel costs turns out to be temporary, American is still in a prime position to increase its dividend payments if it chooses. With a yield that already exceeds what Delta and Southwest pay, there's little pressure for American to do so.

American hasn't found it necessary to increase its dividend since it started paying shareholders nearly two years ago, and it's likely that the airline will keep using share buybacks and other strategies to use its capital. Nevertheless, dividend investors can be more comfortable with American Airlines' prospects than they've been in decades, as the airline takes full advantage of the favorable environment to maximize its profits.

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.

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Stocks Mentioned

Southwest Airlines Co. Stock Quote
Southwest Airlines Co.
LUV
$38.86 (-2.53%) $-1.01
Delta Air Lines, Inc. Stock Quote
Delta Air Lines, Inc.
DAL
$34.46 (-2.49%) $0.88
American Airlines Group Inc. Stock Quote
American Airlines Group Inc.
AAL
$14.98 (-3.34%) $0.52

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