Two Soon to be Members of the Dividend Club

Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Dividend stocks can be particularly useful to one's portfolio for the income they generate and often the stability of the companies that they originate from. But not every company is able to pay dividends. While some are in a growth stage, others are financially unhealthy or heavily leveraged to the point where excess cash is better used to reduce debt. These soon to be dividend payers are from the latter category, but leaving it quickly behind.

Flying Out of Bankruptcy

In a recent announcement, Delta Air Lines (NYSE: DAL) revealed its intention to begin returning cash to shareholders by early 2014. The airline has certainly been making a major turnaround and is expecting to post a profit of $1.6 billion for 2012. All this has been accomplished while the carrier has reduced its debt load from $17 billion in 2009 to a projected $10 billion in 2013. The airline has made other investments for its future by purchasing an oil refinery to reduce the refining spread, and acquiring a 49 percent stake in Virgin Atlantic. With these additions, Delta hopes to slash fuel costs and establish a better presence at London Heathrow. But times were not always good for Delta.

Citing rising fuel costs, Delta filed for bankruptcy protection in 2005. This was a rough decade for the industry as a whole with United Airlines and Northwest Airlines filing for bankruptcy and US Airways seeking protection twice. But the Delta that emerged was stronger than before. Soon after exiting the process, it acquired Northwest Airlines which had also recently exited bankruptcy. The airline managed to navigate its way through a global recession and began to reduce its debt which it continues doing to this day while making the notable acquisitions described above.

Now a healthier Delta is ready to begin rewarding shareholders with dividend payments beginning in 2014. While the dividend is not likely to propel Delta to the spot of a high income stock, it does go a long way to show the progress Delta has made from the bankrupt airline it was less than a decade ago. Stronger fundamentals at the airline are also likely to benefit the share price as investors begin to reward Delta with a higher price to earnings ratio based on a more stable future.

It is also worth noting that the only other tier 1 airline with a dividend is Southwest Airlines (NYSE: LUV) which still yields less than 1 percent. While Southwest's dividend may be seen as more stable due to a longer dividend paying history, the introduction of a dividend at Delta would then make the airline one of only two choices for a major airline with a dividend, possibly attracting a whole new group of investors. But Delta is unlikely to take all airline income investors since many would still see Southwest as a safer option due to its 39 consecutive years of profitability. But if current trends continue, Delta shareholders could be looking at a very bright future of both an increased share price and a dividend for income.

The Insurance Industry's Comeback Kid

Right now the thing American International Group (NYSE: AIG) is best known for is a massive government bailout and this will likely remain true for some time. But AIG investors today are being given a brighter outlook for the future. AIG CEO Robert Benmosche indicated a dividend was in the works for 2013 as the insurer is now on more solid footing.

Indeed, the progress at AIG has been significant. AIG is now free from government hands for the first time since the beginning of the recession. This is a huge accomplishment that has involved the conversion of the Government's preferred stock to common and the selling of numerous AIG owned assets and companies to cover the debt AIG owed the government.

With the worst now in the review mirror, AIG has been looking to rebuild shareholder value for some time. Billions in share buybacks have been a boost to book value and the dividend announcement should open AIG up to investment by income investors. Like Delta, the reinstatement of the dividend is yet another sign AIG has turned a corner and can provide value to its shareholders. With a dividend in place, insurance and financials investors could be attracted to the stock and more dividend based funds may add it to their portfolios. All this combined with the continued strengthening of AIG from its 2008 levels should provide a gain in share price in the long term. For those highly bullish on a long term gain, AIG warrants (NYSE: AIG-) offer the opportunity for a leveraged play with a strike price of $45 per share and a distant expiration of Jan. 2021.

Returns for You

Both Delta and AIG have been through some tough times with one wiping out shareholders entirely and the other destroying nearly all of their investment. But both companies have been implementing meaningful changes and their improving bottom lines have given them the opportunity to return cash to shareholders once again. While dividends are not likely to be big at first, the idea that they would pay one at all is symbolic of their progress. If Delta and AIG can continue in their rebuilding efforts, both should see it benefit their share prices and give them the chance for an even larger dividend in the future. While risks do remain for both companies, with improving fundamentals and the reintroduction of a dividend, the future looks far brighter than the past.

TulipSpeculator1 has a position in Delta Air Lines. The Motley Fool owns shares of American International Group and has the following options: long JAN 2014 $25.00 calls on American International Group. Motley Fool newsletter services recommend American International Group and Southwest Airlines. 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!

blog comments powered by Disqus