Dividends From a Legacy Airline

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After doing everything from buying up teen-aged MD-90s, purchasing an oil refinery, and acquiring a 49 percent stake in Richard Branson's Virgin Atlantic, Delta Air Lines (NYSE: DAL) looks like it's ready to shake up the image of a legacy airline again. On Dec. 12, the Wall Street Journal reported Delta's CEO Richard Anderson is looking to begin returning cash to shareholders in 2014. While Delta's dividend is still 1.5 to 2 years away, it is worth a look as to what other airlines are giving back to their shareholders.

The Low Yield Model

Coming in at a whopping four cents per quarter, SkyWest (NASDAQ: SKYW) is not exactly a dividend king. However, in an industry where legacy airlines rarely pay dividends and even many non legacy carriers do not offer dividends, SkyWest's yield of 1.33 percent shines for shareholder profit return.

SkyWest is not the airline most people would know they are buying a ticket on. Instead, they operate regional flights for major carriers including United Continental, Delta, US Airways, Alaska Airlines, and now American Airlines. As an operator of regional flights, SkyWest can pass many of its costs, including fuel, on to the major carrier. SkyWest has been showing a pattern of growth through its 2010 acquisition of ExpressJet and with a dividend of only 1.33 percent, the carrier clearly is looking to grow shareholder value through means other than dividends as well.

The High Yield Model

Blowing the yield of most dividend stocks out of the water, Chorus Aviation (TSX: CHR.B) brings home a yield of just over 15 percent. Like SkyWest, Chorus operates regional flights. However, unlike SkyWest, Chorus does not have a diverse customer base with flights for Air Canada making up over 99 percent of the airline's revenues.

Additionally, there have been calls by many analysts that Chorus' dividend may be at risk of being cut. Chorus has a high payout ratio compared to SkyWest and a recent expected change in the payment structure with Air Canada could eat into profits. Consequently, expecting a double digit yield from an airline should be considered unlikely.

What About Delta?

While Delta's CEO has not revealed what the dividend will be, it would be reasonable to expect it would not be nearly as large as Chorus'. Since other legacy airlines do not pay dividends, Delta will not be competing with other legacy carriers for dividend investors. Consequently, Delta's dividend may be more for a symbolic purpose and thus be closer to SkyWest's 1.33 percent.

Perhaps, the most important take away from Delta's announcement is improving fundamentals at the airline. Dividends are set to start after debt is reduced to $10 billion by the end of 2013 from $17 billion in 2009. Additionally, the airline is predicting a strong 2013 profit and cost cutting measures including the refinery purchase are expected to begin paying off. Whether or not Delta's dividend makes it an income investment, I believe it offers one of the best values in the airline industry. Even if the dividend ends up only being a token amount.


TulipSpeculator1 owns shares of Air Canada and Delta Air Lines. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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