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Southwest Airlines Hikes Dividend, Unveils New Buyback Plan

Zacks Equity Research

Close on the heels of Delta Air Lines’ DAL quarterly dividend hike, low-cost carrier Southwest Airlines LUV announced a dividend raise along with a new share repurchase program worth $2 billion. The investor-friendly announcements were made at the Dallas-based carrier’s 2017 annual shareholders meeting.

Dividend

The carrier raised its cash quarterly dividend to 12.5 cents per share (50 cents per share annualized), representing an increase of 25% over the previous quarterly payout of 10 cents per share (40 cents per share annualized).   

We believe that the dividend hike not only highlights Southwest Airlines’ commitment to create value for shareholders but also underlines the carrier’s healthy financial condition and business strength. It is evident from past records that Southwest Airlines has a stable dividend payment history. The new dividend will be paid on Jun 28, 2017, to shareholders of record as of Jun 7. This will mark the 163rd consecutive quarter of dividend payment for Southwest Airlines.  Based on the closing share price on May 18, the increased dividend translates into a yield of approximately 0.87%.

Share Repurchase

The latest $2 billion share buyback program marks another stockholder-friendly move by Southwest Airlines. The new buyback scheme will replace another $2 billion repurchase plan which was completed recently. The carrier bought back approximately 34.6 million shares under the previous $2 billion buyback program before the launch of the $400 million accelerated share repurchase plan on May 5, 2017.

We are impressed by Southwest Airlines’ efforts to enhance shareholder wealth through dividends and share buybacks. In the first quarter of 2017, the company returned $673 million to shareholders through a combination of dividends and share repurchases.

Oil Price Well Below Historical Highs

It is a well-documented fact that airline players, including Southwest Airlines, have reaped huge benefits from the cheap oil over the past few years. As expenses associated with fuel represent one of the key input costs for airlines, the fall in oil prices has resulted in huge savings for carriers, thereby strengthening their balance sheets.

Oil is currently hovering around the $50 a barrel mark. While this represents a strong resurgence from the 12-year low of around $26 a barrel hit in Feb 2016, we note that the commodity is trading at levels much lower than those ($100+ a barrel) witnessed in mid-2014.

Southwest Airlines has utilized its improved financial position for shareholder and employee-friendly activities among other things. We are impressed by the company’s employee-friendly approach. In Feb 2017, the carrier paid $586 million to its employees as part of its profit-sharing plan for 2016.

Buoyed by a strong balance sheet, Southwest Airlines has made significant investments to improve its passengers’ flying experience. Its efforts to modernize its fleet also raise optimism.

Price Performance

Southwest Airlines shares have underperformed the Zacks categorised Transportation- Airline industry on a year-to-date basis. Shares of the company have rallied 14.9% so far this year, compared with the industry’s gain of 18.4%.

The carrier’s investor-friendly announcements might give the much-needed lift to the stock.

Zacks Rank & Stocks to Consider

Southwest Airlines currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the airline space include Deutsche Lufthansa DLAKY and Ryanair Holdings RYAAY. Both stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here

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