The airline industry has done extremely well in recent years, and Delta Air Lines (DAL 0.26%) and United Continental Holdings (UAL 0.37%) have both been big beneficiaries of the positive trends that have helped drive up revenue and profits. However, airlines have hit some turbulence after their nearly straight upward climb in past years, and investors now want to know which airline is the best buy right now.
Let's compare Delta Air Lines and United Continental Holdings on several key metrics to see which one looks more attractive today.
Delta and United have seen their stocks move in opposite directions over the past year. Delta is up 9% since March 2015, but United Continental is off about 15% over the same period.
From comparing the two companies' stock-price movements to their earnings, investors seem dubious about both airlines' ability to sustain their current levels of profitability. Delta shares currently trade at a trailing earnings multiple of less than 9, which offers a steep discount to where the overall stock market trades right now. United Continental's trailing price-to-earnings ratio is an even more compelling 3, but that includes a one-time tax benefit that inflated the airline's GAAP earnings by more than $3 billion in 2015.
Looking at forward earnings gets rid of those one-time impacts, and there, both airlines carry similar valuations. Delta's forward multiple of 6.7 is only a bit higher than the 6.5 forward multiple United Continental has. Given how close to each other those figures are, and how low both are compared to the overall market, it's hard to give either company much of an edge on valuation grounds.
When it comes to dividends, though, there's a clear favorite between these two stocks. United Continental doesn't pay a dividend, but Delta does. Delta's current yield is 1.1%, reflecting the 50% increase to its payout the airline implemented last summer.
Both Delta and United have had bankruptcy proceedings in the past, and both have made large acquisitions that have put competing demands on their newfound profits. Delta started paying a dividend in 2013, having emerged from bankruptcy protection in 2007. Its merger with Northwest Airlines was completed in late 2008, creating what was, at the time, the nation's largest airline. Five years of strong conditions gave Delta time to consolidate its merged operations and prepare for dividend payments.
United emerged from bankruptcy in 2006, but its merger with Continental was more recent, closing near the end of 2010. By that measure, one could argue that if Delta was able to pay a dividend five years after its merger was complete, United should have started making payments by now.
Nevertheless, United hasn't yet done that, so Delta remains the only dividend payer of the two. Accordingly, Delta gets the advantage from the dividend front.
Airlines have enjoyed huge tailwinds that have boosted profits in recent years, and investors have to wonder just how long the good times can last. In Delta's most recent earnings report, adjusted earnings climbed by more than half, and plunging fuel costs played a key role in enhancing profitability. Declines of 1.6% in passenger unit revenue weren't entirely what investors wanted to see, but they were less severe than the roughly 2.5% to 4.5% drop Delta had expected in its early guidance for the quarter. Further deterioration in passenger metrics could continue, but continuing cuts in fuel costs could produce even more short-term earnings growth for Delta.
United Continental has shown similar success in its recent results, although some have noted that it hasn't been entirely as strong as Delta and other airline peers. Full-year 2015 pre-tax profit almost quadrupled from 2014 levels even before accounting for the huge one-time income-tax benefit, and adjusted pre-tax margins hit 11.9%, which marked substantial progress in closing the gap between it and Delta. However, United gave guidance for a substantial 6% to 8% drop in passenger unit revenue during the first quarter of 2016, and that will likely reduce the airline's pre-tax margins back into single-digit percentages. That arguably gives the growth category to Delta -- at least until United can fully turn things around and boost its margins further.
Delta Air Lines features a similar valuation to United Continental while offering a modest dividend and slightly more promising growth prospects. Accordingly, Delta looks like the better buy right now. Given time, though, United also appears to be making progress toward catching up with its airline peer.