Delta Air Beefs Up Dividend, New Buyback

Delta Air Lines (NYSE:DAL) declared that its board of directors has approved a new share repurchase program worth $5 billion. Simultaneously, the airline behemoth increased its quarterly dividend by 50%. Shares of the company climbed 1.48% to $46.78 per share following the twin investor-friendly moves on the company’s part. Delta expects to return in excess of $6 billion to its shareholders through 2017.

Dividend

The company raised its cash quarterly dividend to 13.5 cents per share (54 cents per share annualized), representing an increase of 50% over the previous payout of 9 cents per share. The new dividend, which has been approved by the company’s board of directors, will be paid to investors from the third quarter of 2015. Based on the closing share price on May 13, the increased dividend translates into a yield of 1.15%, higher than the industry yield of 0.78%.

We believe the dividend hike not only highlights Delta’s commitment to create value for shareholders but also underlines the carrier’s healthy financial condition and confidence in its business, going forward. It is evident from past records that Delta has a stable dividend payment history. The company has been consistently rewarding its shareholders through dividends since 2013.

Share Repurchase

The latest $5 billion share buyback program marks another move by Delta to add value to its stockholders. The new share repurchase plan, which will replace the existing $2 billion share buyback, runs through 2017. The carrier stated it has already bought back shares worth $1.275 billion under the current program that was announced in 2013. The remaining amount is expected to be exhausted by Jun 30, 2015, thus marking the expiry of the $2 billion buyback program one and a half years ahead of schedule.

We are impressed by Delta’s efforts to enhance shareholder wealth through dividends and share buybacks. During the first quarter of 2015, the company returned $500 million to its shareholders. The carrier paid $75 million in cash dividends and bought back 9.3 million shares for $425 million. In 2014, the company returned a total of $1.35 billion to shareholders through dividend payments and stock buybacks. The expiry of the $2 billion program will mean that Delta has returned $3 billion to shareholders through dividend payments and stock buybacks since 2013. The company stated that it intends to return half the free cash flow to its stockholders through 2017.

Fuel Savings = Shareholders’ Gain

The massive savings from reduced fuel costs among airline companies are translating into huge benefits for shareholders. Delta is no exception. Low fuel costs are expected to result in over $2 billion in savings for the company this year.

We note that airline stocks in general have benefited from plunging oil prices given the inversely proportional relation between crude prices and the value of stocks. Crude prices have remained weak over the recent past due to an over-supplied oil market, especially in the face of lackluster global demand.

Despite the recent rally, crude prices have been hovering around the $55 a barrel mark. This represents a significant decline from the approximately $105 per barrel in July last year. In fact, oil prices have been fluctuating lately after hitting a 6-year low of under $44 in Mar 2015.

Debt Woes Reduced

Delta also said that it intends to reduce its adjusted net debt to $4 billion by Dec 31, 2017 from the $7.4 billion recorded at the end of the first quarter of 2015. As a result of the company’s efforts to bring down its debt levels, net interest expense of about $200 million will be incurred on an annualized basis. We note that the company has reduced its net debt significantly since 2009.

Zacks Rank

Delta carries a Zacks Rank #3 (Hold). Better-ranked stocks in the transportation sector include JetBlue Airways Corporation (NASDAQ:JBLU), Knight Transportation Inc (NYSE:KNX) and Covenant Transportation Group Inc (NASDAQ:CVTI). JetBlue carries a Zacks Rank #2 (Buy), while Knight Transportation and Covenant Transportation Group sport a Zacks Rank #1 (Strong Buy).

Original post