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Summary

  • Delta Air Lines, Inc. recently announced its plan for a 50% increase in its dividend per share and a $2 billion share repurchase program to be completed by December 2016.
  • Delta is also hoping to reduce its debt to $5 billion before the end of FY 2016 by generating more cash flows from optimization of capital expenditures and improving performance.
  • Delta has recorded strong upward movements in the earnings estimate revisions, indicating that analysts are becoming more hopeful regarding Delta's earnings for the current quarter and the fiscal year.

Delta Air Lines, Inc. (NYSE:DAL), an air transportation service provider, has recently announced its plan to increase rewards for its shareholders. The company will pay more returns to its shareholders by way of increased dividends, as well as by buying back shares in the next two and half years. In this article, I will discuss the higher returns Delta has planned for its investors and the factors that will enable the company to pay these higher rewards. My article will also include a discussion on other aspects that indicate a bright future outlook for the company.

Higher Return for Shareholders

As part of Delta's recently announced program to return cash to its shareholders, the company's board of directors has endorsed a 50% increase in the quarterly dividend paid by the company. This will result in the company paying 9 cents per share as quarterly dividends to its shareholders, up from its current quarterly dividend payment of 6 cents per share. The shareholders will begin receiving this higher dividend from the quarter of September 2014. This alteration in the dividend payout will result in an annual payout of around $300 million.

Furthermore, Delta has recently disclosed that its board of directors had also approved a new share repurchase program worth $2 billion. The share buyback program will be accomplished before the end of December 2016.

Combined, the new increased dividend and the share repurchase program are likely to return an additional $2.75 billion worth of cash to Delta's shareholders in the coming two and half years. Before this, Delta had commenced a $500 million share repurchase authorization in May 2013. This share buyback program was intended to be completed by June 2016, but the company has recently projected it would conclude by early June 2014, which will be 2 years ahead of its expiry date. The company completed a $375 million share buyback program under its May 2013 share repurchase program by the end of Q1 FY 2014. Hence, the company has $125 million of May 2013's share buyback program that it will complete in Q2 FY 2014.

In addition to returning more to its shareholders, Delta is also striving to strengthen its balance sheet.

Strengthening the Balance Sheet

Delta is hoping to reduce its debt to $5 billion before the end of FY 2016. The company's successful efforts to reduce its debt load year-over-year can be seen in the following chart.

Source: DAL Bank of America Transportation Conference

Delta's adjusted net debt stood at $9.1 billion at the end of Q1 FY 2014, down from $9.4 billion at the end of FY 2013. As a result, Delta is thriving on its credit metrics, and Fitch anticipates it will be stronger in the coming periods.

The company has enacted considerable initiatives to improve its financial health and to generate free cash flows to create an opportunity to reward its shareholders with high returns in the form of dividends and buybacks. Delta is controlling and keeping its capital spending in form through the capital efficient restructuring of its domestic fleet. This fleet restructuring involves replacing the small regional aircraft with larger aircraft using a good combination of new and used aircraft, as well as an up-gauged fleet. These strategies have enhanced Delta's airline capacity, resulting in better revenue generation and improved cost efficiency for Delta. The following graph shows the trends of decline in Delta's domestic fleet aircraft count, but increase in the airline capacity in terms of average total seats as well as improvements in the profit margins.

Source: DAL J.P. Morgan Aviation, Transportation and Industrials Conference Presentation

Consequently, Delta was able to enlarge the difference in the company's operating cash flows and capex (see chart below). Therefore, the secret to Delta's strong cash flows is that it has been competent to grow earnings without making enormous capital spending on new aircraft. This is enabling Delta to generate more free cash flow to pay back debt, as well as higher returns to its shareholders.

Source: Delta: Setting A New Standard Presentation

Overall, the company's efforts are resulting in its improved financial performance, and have also strengthened the company's financial position. The healthier operating environment as a result of recovery and the growth of the airline industry has also allowed the company to improve its financial performance. The airline industry as a whole is emerging with enhanced profit margins and improved risk profiles.

The Stock is Setting New Highs

Delta is emerging as an attention-grabbing play for investors. Not only does the stock have an attractive short-term momentum, but it is recording a strong movement on the earnings estimate revision facade as well. The upward movements in the earnings estimate revisions for Delta indicate that the analysts are becoming hopeful regarding Delta's earnings for the current quarter and the fiscal year.

During the past month, 8 estimates for Delta have gone up and none have gone down. Delta's earnings estimate for Q2 FY 2014 has increased from 83 cents per share a month ago to $1.00, reflecting an upward movement of 20.5%. The consensus estimate for the company's EPS for FY 2014 has also gone up from $2.60 per share to $2.95 per share, reflecting an increase of 13.5% during the past month. Moreover, the company's share prices are setting new highs, as shown in the following chart.

Source: YCharts

Final Take

Delta's recent announcements of improved returns to shareholders in the form of higher dividends and more stock repurchases indicate the confidence of Delta's management in the strategies it is enacting. These strategies include optimizing the capital expenditure on the aircraft fleet to generate more free cash flows, as well as saving costs. The company is also using its improved cash flows to heavily offload its debt and in turn strengthen its balance sheet. The improvement in the airline industry will also continue benefiting the company's top line in the coming years. These factors suggest that Delta is a good choice for investors.

Source: Delta Air Lines: A Good Choice For Investors