The Best Airline Stock for Long-Term Dividend Income

airline-stockAirlines are actually making money. And it isn’t just because of low oil prices. After many years of consolidation, the airlines have been able to raise fares and charge other fees.
In the early 2000s there were nearly 10 airlines that controlled over 80% of the U.S. airline market. Now there are only four. This type of industry consolidation has limited capacity and given airlines pricing power. For the first time in many years, airlines have actually been making money.
With all this industry change, one of the more overlooked aspects is the fact that many airline operators are now more shareholder friendly and are offering investors buybacks and dividends.
Dividends in the airline industry have been on the rise over the last half decade. Specifically, industry-wide dividends are up over 140% for the last five years.
You have some of the major airline stocks, like American Airlines (NYSE: AAL), paying a 0.8% dividend yield. Some regional airline stocks are paying dividends as well, including Alaska Air Group (NYSE: ALK), which offers a 1.2% dividend yield.
But they still aren’t the best dividends in the space. This week, both Southwest Airlines (NYSE: LUV) and Delta Air Lines (NYSE: DAL) are paying shareholders more.
Delta announced last week that it has upped its quarterly dividend by 50% to 13.5 cents a share. Even with that large increase, its dividend payout will still only be 10% of its free cash flow.
Southwest has been paying a dividend longer than any other airline, having initiated a dividend in the 1970s. But that luster could be wearing off. Last week it decided to up its quarterly dividend by 25%.

The Best Airline Stock Play

Of the two major airlines announcing bigger dividends last week, Delta Air Lines is actually cheaper than Southwest Airlines and pays a higher dividend. Delta’s dividend yield is 0.8%, compared to Southwest’s 0.6%. Delta also trades at a forward price-earnings ratio (based on next year’s earnings estimates) of 8.4, while American Airlines trades at 11.4 times forward earnings.
But it’s not just valuation and dividends. Delta has also bought back $1.4 billion in stock over the last 12 months, while Southwest has bought back $940 million worth of shares.
Delta plans to return over half of its free cash to shareholders over the next three years. It will still be able to do this while keeping a focus on debt reduction. Delta plans to reduce debt down to $5 billion by the end of next year. At the end of 2010 it had $15 billion in debt.
Delta is selling off older planes this year, which means more money for shareholders. It’s also working on capturing market share from other players. This includes replacing coach and first class with five new tiers of seats. It will also be offering flatbed seating for longer-haul flights. Then there’s the fact that Delta is also rolling out Starbucks (NASDAQ: SBUX) coffee and Wi-Fi for some of its flights.
Unlike Southwest, Delta is a major international operator and should benefit from not just a rebound in the U.S., but also global economies.
Southwest has succeeded, up until now, by being able to steadily increase its fares. However, that could change going forward, partly because Southwest will be facing more competition as it tries to break into international markets. It’s also entering congested U.S. markets, like Atlanta and LaGuardia Airport in New York.
Delta Air Lines just started paying a dividend within the last three years, but this is already its third dividend increase. It’s one of the cheapest and most shareholder-friendly stocks in the bustling airline industry.

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