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What Does Southwest's (LUV) Dividend Hike Mean for Airlines?

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Last week, Southwest Airlines Co. (LUV - Free Report)    — one of leading players in the airline space — announced a 28% hike in its quarterly dividend payout to 16 cents per share (annualized 64 cents per share). The first installment of the raised dividend will be paid on Jun 27, 2018 to shareholders of record as of Jun 6.

This latest move highlights Southwest Airlines’ commitment to create value for shareholders and underscores the company’s strong financial condition as well as bright prospects, going forward. Moreover, a look at past records reveals Southwest Airlines’ stable dividend payment history. Notably, this marks the low-cost carrier's 167th straight quarter of dividend payment.

Shareholder-Friendly Measures Highlight Strong Balance Sheets

Apart from Southwest Airlines, its fellow airline companies like SkyWest, Inc. (SKYW - Free Report) and Alaska Air Group, Inc. (ALK - Free Report) have raised their dividend payouts this year. Moreover, Hawaiian Holdings, Inc. (HA - Free Report) , the parent company of Hawaiian Airlines, started paying dividends from October, 2017.

Southwest Airlines’ board of directors also cleared a new share buyback program worth $2 billion. The new program is set to begin on completion of the existing $2-billion share repurchase authorized in May 2017.

These investor-friendly measures clearly highlight the financial prosperity of stocks in the airline space. The strong balance sheets of sector participants have made them invest substantially for promoting safety and enhancing productivity.

While Alaska Air Group carries a Zacks Rank #3 (Hold), SkyWest has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Uptick in Shareholder-Friendly Activities Likely

With the advent of the new tax law (Tax Cuts and Jobs Act), the financial health of airline players is likely to improve further. This is because, more cash is expected to remain in the hands of these companies to fund their capital expenditures, acquisitions and share repurchases among others due to the significant reduction in tax bills.

Consequently, an increase in the shareholder-friendly measures (dividends, buybacks) is very much in the cards for the airline space. For example, we expect Delta Air Lines, Inc. (DAL - Free Report) to hike its dividend shortly. This bodes well for shareholders who will gain in the form of dividend hikes and more buybacks.

As investors prefer an income generating stock, a high dividend paying one is much coveted. Needless to say, investors are always on the lookout for companies that have a track record with respect to dividends/buybacks.

Solid Demand for Air Travel Bodes Well with Approaching Summer

Airlines’ robust financial health has allowed them to make investments for improving onboard experience. Strong demand has also prompted airlines to add routes. For example, United Airlines — the wholly-owned subsidiary of United Continental Holdings, Inc. (UAL - Free Report) — recently added routes from New York/Newark and Washington-Dulles.

Given higher demand for travel from New York, the carrier aims to attract traffic on the routes. Improvement in domestic economy has contributed to the upside. With consumer confidence remaining upbeat, more and more Americans are taking vacations.

With demand remaining strong, we expect airlines to rake in significant profits in the upcoming summer season despite the rise in oil prices. Summers usually represent a very busy time for airlines and this year is likely to be no different. In fact, despite high fuel costs air fares had declined sharply in April, according to data released by the Bureau of Labor Statistics.

Valuation Attractive Despite High Fuel Costs

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 6.2 (the lowest point in the last six months), which compares favorably with the market at large as the current EV/EBITDA for the S&P 500 is at 11.2. The industry’s favorable positioning compared with the overall market certainly signals more upside.

 

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