The robust U.S. job data for February bodes well for the domestic economy. In fact, American businesses have recorded the strongest jobs growth in a year and a half in February. Factors like warmer-than-normal weather conditions and Trump’s business-friendly tax reform contributed to the impressive numbers.
While the economy is currently basking in the glory of the February job data, it is worth noting that market participants were gripped by fears of inflation only a month back. Notably, both the Dow as well as the S&P 500 had entered into the correction territory on Feb 9. In fact, the significant increase in the CBOE Volatility Index (VIX) highlighted the heightened volatility in the market at that time.
Given the fluctuating nature of the U.S. equity market, investing in companies that pay consistent dividends seem to be a prudent strategy right now. This is because such companies are financially stable and mature and can even generate steady cash flow irrespective of market conditions.
Airlines: A Sector to Consider
A sector that boasts well-paying stocks in terms of dividends, is the one having airline stocks. Infact, airlines have rebounded nicely after having laid low by hurricanes last year.
Markedly, the financial prosperity of airline stocks has contributed to their shareholder-friendly attitude. This is well-reflected by its healthy price performance over the last six months. The Zacks Airline industry has gained 13.7% in the period, outperforming the S&P 500’s 11.9% rally.
Factors like healthy demand for air travel and improving unit scenario have contributed to the bullish sentiment surrounding airlines. The Zacks Industry Rank of 97 (out of 250 plus groups) carried by the Zacks Airline industry further highlights the attractiveness of airlines. The favorable rank places the companies in the top 38% of the Zacks industries.
We put our entire 250-plus industries into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).
Over the last 10 years, using a one week rebalance, the top half beat the bottom half by a factor of more than 2 to 1.
Click here to know more: About Zacks Industry Rank
Moreover, the fact that Warren Buffett — one of the most revered investors of all time — continues to show his affinity for airline stocks bodes well for the sector. Last month, the "Oracle of Omaha," in an interview to CNBC, did not reject the possibility of eventually owning an airline company, thus showcasing his interest in the space.
More Dividend Hikes Likely Under the New Tax Law
The new tax law (Tax Cuts and Jobs Act), which reduces corporate tax rate significantly, is a huge positive for airline stocks. This is because it is likely to boost cash flow and in turn improve the bottom line of carriers. Moreover, the fact that the likes of Southwest Airlines Co. (LUV - Free Report) and JetBlue Airways Corp. (JBLU - Free Report) declared bonuses ($1,000 per member), following the tax overhaul, highlights the optimism on stocks pertaining to this measure.
Meanwhile, the likes of Alaska Air Group, Inc. (ALK - Free Report) and SkyWest, Inc. (SKYW - Free Report) have already announced hikes in their respective dividend payouts in 2018. We expect other carriers to do the same in view of the Tax Cuts and Jobs Act.
Notably, huge savings owing to the reduction in corporate tax rate implies that more cash will be available to fund their capital expenditures, acquisitions and share repurchases, among others. This bodes well for shareholders who will gain in the form of dividend hikes and more buybacks.
Valuation Signals More Upside
Going by the EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation and amortization) ratio — which is often used to value airline stocks — given their significant debt levels, and high depreciation and amortization expenses, the industry does not look expensive at this point.
The industry currently has a trailing 12-month EV/EBITDA ratio of 6.9, which compares favorably with the market at large, as the current EV/EBITDA for the S&P 500 is at 12.2. The industry’s favorable positioning compared with the overall market certainly signals more upside.
Dividend Paying Airlines Should Grace Your Portfolio
In view of the tailwinds mentioned above, we believe that stocks from the airline space should be present in one’s portfolio. Moreover, dealing with dividend stocks is a prudent strategy during uncertain times like the current scenario. Markedly, the best dividend stocks that pay out a healthy yield and have strong prospects are less susceptible to market downturns.
Given the significant reduction in taxes, we expect the already cheap airline stocks to fly higher, going ahead. Consequently, we have zeroed in on three stocks in this high flying space, which have a strong dividend paying history. Moreover, each of the selected stocks sport a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Delta Air Lines, Inc. (DAL - Free Report) is a leading provider of scheduled air transportation for passengers and cargo in the United States as well as internationally. The company, based in Atlanta, GA, has a Zacks Rank #2 and a Value Score of A.
The company has a dividend yield of 2.18%. Also, Delta has been consistently rewarding its shareholders through dividends since 2013. Notably, it has hiked dividend pay-outs significantly for four consecutive years since then. The latest hike was announced in May 2017, when the company’s board of directors approved a 50.6% dividend hike in its quarterly cash dividend to 30.5 cents per share. We expect the company to raise its dividend this year too.
American Airlines Group, Inc. (AAL - Free Report) , headquartered in Fort Worth, TX, is another established name in the airline space paying regular dividends. This Zacks Rank #2 legacy carrier has a Value Score of A. The company has a dividend yield of 0.71%.
International Consolidated Airlines Group, S.A. (ICAGY - Free Report) based in Madrid, Spain, was founded in 2010. The carrier has a Zacks Rank #1. The company has a dividend yield of 2.48%.
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