The American economy is still buoyant and people are traveling, trends that continue to boost growth in the U.S. airline industry despite a recent uptick in fuel prices.
The business has never been known as a fruitful source of shareholder dividends, but thanks to this success, the situation has changed -- more are inclined to hand out dividends to their investors. It nearly goes without saying that not all are created equal; here's the airline sector payout that I think flies above the rest.
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Flying in tight formation
The dividend-paying carriers traded on U.S. stock exchanges generally tended to pay out at around the same rate well into 2017. At least they did until Delta Air Lines (NYSE: DAL) and Panama's Copa Holdings hiked their payouts. Now, Delta's yields 2.4%, and Copa weighs in at 2.5%. Behind them, Alaska Air Group (NYSE: ALK) and China Southern Airlines both yield just under 2%.
A bit down the ladder is Hawaiian Holdings, which recently initiated a 1.4% dividend. The low end belongs to the sub-1% yields of American Airlines Group and Southwest.
Hawaiian's payout is too new to be reliable, while those of American and Southwest are too low to make the cut as best dividend stock (no matter the other positive qualities both companies possess). Meanwhile, Latin American economies have a history of being volatile, which would dampen my enthusiasm for Copa Holdings.
As for China Southern, it's a profitable operator in a market full of people hungry to travel. Competition is intensifying in the country, though, and higher costs are biting into the company's bottom line. As such, it's not a strong candidate for the best dividend prize.
That leaves the two U.S. airlines: Delta and Alaska.
Consolidation and growth
Of the pair, Alaska is the company bulking up. Last year, it acquired Virgin America in a deal valued at $2.6 billion, boosting its already strong lineup of West Coast routes.
It also added considerably to the top line. In Alaska's Q3, revenue shot up by 35% on a year-over-year basis thanks largely to the consolidation of Virgin America. The company's adjusted operating profit, by contrast, declined at a 13% clip, while its free cash flow turned negative.
This can be traced to Alaska's performance in California, a competitive market with pricing pressure on a number of popular routes. In the near future, Alaska is likely to eliminate some capacity on the less-busy circuits, which, if done effectively, should goose FCF and the bottom line. In other words, the airline is in consolidation mode, so it might be some time before those fundamentals improve significantly.
Delta has had its struggles recently, most prominently the natural disasters that plagued its home region of the Southeast U.S. In spite of that, the resilient company's Q3 results were encouraging, with revenue growth approaching 6%, the strongest showing in several years. Growth in the Latin American market helped, as did the take from the Delta SkyMiles frequent flyer program.
As a result, adjusted operating profit didn't crater as much as it might have, given those headwinds. At the end of the day, it slipped by under 10% on a year-over-year basis.
Going forward, it seems that continued strength in fuel prices (typically an airline's No. 2 cost item) will keep dampening profitability in the near future. On the plus side, Delta is anticipating 2% to 4% growth in passenger unit revenue, on the back of anticipated growth in its key revenue sources, and an approximate 2% expansion in capacity.
And the winner is...
Basically what we have is one airline that's still digesting a recent acquisition, and a more established operator showing good signs of growth. Of the two, I feel the latter currently has a better chance of improving its profitability and cash flow once 2018 rolls around. This, by extension, should provide the resources to at least maintain, if not increase, the dividend. So, my choice for best airline dividend stock is Delta.
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