Since airline stocks peaked last year, the market has obsessively feared that the sector would return to the ways of the past. During this period, capacity increases are generally viewed in a negative light regardless of the reasoning.
Southwest Airlines (NYSE:LUV) has played a prominent role in the capacity gains discussion as it is the only one of the large airlines in the market that is growing. Despite assurances that airlines would reduce capacity with rising oil prices, the June traffic report again triggered reasons to love the stock.
Record Load Factor
The market likes to focus on RASM (revenue per available seat miles), but this number ignores the cost equation. Another key focus of the market is capacity gains via the ASMs (available seat miles), but this number ignores the passengers on the plane.
One key number that is telling to whether an airline is matching capacity with pricing is the load factor. This number measures how full the airplanes are and Southwest Airlines set a company record for the month of June. The average flight had a load factor of 87.4%, a 1.2 point increase from last June.
The market wants to focus on the less than 1.0% increase in the RASM, but this number is perfect in an environment where the airline has grown capacity by 6.9% for the year. When capacity is growing and costs are historically low, Southwest Airlines doesn't need to raise ticket prices in order to generate huge profits.
One key point to the June traffic numbers is that the airline is slowly reducing the growth of capacity with a gain of only 5.4% for the month.
Relatively High Yield
In a market flocking to utility stocks offering 3% dividend yields at P/E ratios around 20, Southwest Airlines offers a solid relative value. The airline actually offers investors a higher yield, but the market isn't interested in the non-dividend portion of capital returns.
For Q1 alone, the airline repurchased $500 million worth of shares in addition to paying the dividend with a roughly 1.0% annual yield. Utility stocks like Consolidated Edison (NYSE:ED) and Southern Company (NYSE:SO) offer meager 3.2% dividend yields without stock buybacks.
The market, though, apparently loves these stocks, sending the P/E ratios nearly double the ratio of Southwest Airlines. All while the net payout yield (net stock buyback yield plus dividend yield) is surging as the market ignores the total amount the airline returns to shareholders.
As a note, Southwest Airlines announced the intent to complete the remaining $200 million on the stock buyback plan during Q2. At that time, the airline announced another $2 billion stock repurchase plan with an accelerated repurchase of $500 million.
The market continues to make the incredible mistake of rushing into dividend-only stocks and ignoring the value of other top-notch companies. Southwest Airlines offers investors a better deal and a better capital return strategy that will pay off when some normalcy returns to the equity market.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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