Southwest Hikes Div, Revises Delivery

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In an attempt to enhance shareholders’ value, Southwest Airlines (LUV) announced a 400% hike in quarterly dividend to 4 cents per share from a penny per share, marking the second increase since 2012. On an annualized basis, the total amount of dividend payout is expected to reach over $100 million. The dividend will be paid on Jun 26, to stockholders of record on Jun 5.

Additionally, the company also raised its stock repurchase plan to $1.5 billion from the existing program of $1 billion. As of May 14, Southwest has bought back about 82 million shares, worth $725 million, under its previous share repurchase authorization. Considering the increase in the authorization, the company now has the authority to buyback an additional $775 million of common stock, of which $250 million will be repurchased through an accelerated-repurchase program.

Alongside these announcements, Southwest unveiled an aircraft purchase order restructuring initiative that is expected to induce cost savings in the coming five years. The company switched five orders for The Boeing Company’s (BA) 737-700 into 737-800s and abandoned a set of five purchase orders of Boeing Next Generation jets each in 2014 and 2015.

The Dallas-based airline is looking forward to possess the new Boeing 737 MAX-7 after 2019 through 2021. Designed with the latest CFM International LEAP-1B engines, the Boeing MAX jets are expected to reduce fuel consumption and lower CO2 emissions by over 12%.

Between 2014 and 2015, Southwest will buy 10 used Boeing 737-700s from the low-cost Canadian carrier WestJet for an undisclosed price. These jets will be used in place of the older Boeing 737-300s and 737-500s that are set to retire in the next few years, and until the company gets the advanced MAX planes. Additionally, the company has postponed the purchase of 41 next-generation 737s from 2014 to 2018 and aims to buy 737 MAX jets beyond 2024.

The amended delivery schedule will work in favor of the company by trimming its capital expenditure on aircraft orders through 2018 by more than $500 million. The company has also deferred about $2 billion of potential capital spending on jet deliveries after 2018.

With this revised delivery structure, Southwest’s annual average capital commitment for aircraft will be approximately $1 billion to $1.2 billion, through 2024. For 2013 and 2014, the figure is likely to be around $900 million and $1.2 billion, respectively.

Southwest – which operates along with the likes of Delta Air Lines Inc. (DAL) and JetBlue Airways Corporation (JBLU) – currently holds a Zacks Rank #2 (Buy).
 

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