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Delta Air Lines: Dividend Stock With Low Valuation/Competitive Advantages

Mar. 05, 2020 1:05 PM ETDelta Air Lines, Inc. (DAL) Stock39 Comments
David Zanoni profile picture
David Zanoni


  • Delta Air Lines still has plenty of value in a market that trades significantly above historical valuation levels.
  • Delta's refinery operations and strong focus on customer loyalty give the company a competitive advantage.
  • DAL increased the dividend every year since 2013.
  • Looking for a helping hand in the market? Members of Margin of Safety Investing get exclusive ideas and guidance to navigate any climate. Get started today »

There may not be many profitable stocks in this market with low bargain valuations, but Delta Air Lines (NYSE:DAL) is one of the exceptions. In fact, many of the major and regional airlines are trading with forward PE ratios in the single digits. In addition to the low valuation, Delta has competitive advantages with its refinery operations and recognition for customer loyalty.

While I typically write about above-average growth stocks, I occasionally write about low growth dividend stocks as well. Delta's earnings growth is expected to be a little below average in 2020 (consensus). Delta is expected to grow revenue at close to 4% and earnings at about 5% in 2020 as compared to the expected revenue growth of 5.2% and earnings growth of 9.1% for the S&P 500 (SPY).

While Delta's lower-than-average growth could cause the stock to underperform the broader market, the low valuation leaves plenty of room for PE expansion. So, good news in the form of earnings beats, new joint ventures or acquisitions, etc. can have a strong positive effect on the stock. So, it is possible that Delta's stock performs better than average even with low growth as investors look for a combination of value and dividend yield in this phase of the maturing bull market.

Delta Air Lines 2020 Momentum


Delta's Low Valuation

Any profitable companies that are trading with forward PEs below 10 are something to explore. Delta fits that category with a forward PE of about 6. Here's how Delta compares to its peers:

Delta American Airlines (AAL) United Airlines (UAL) Southwest (LUV)
Forward PE 6.5 3.7 4.9 10.3
PEG 0.49 0.39 0.42 1.0
EV/EBITA (fwd) 4.8 5.3 4.3 5.56
Price/Sales (fwd) 0.60 0.17 0.34 1.04

Source: Table created by Author with data from Seeking Alpha

Frankly, all of the large airlines are

The 2020s will see the transformation of the economy during the 4th Industrial Revolution. We are also running head first into a wave of demographic and debt driven problems that will need solving. A cautious but forward looking approach will be required to thrive in what could be a lost investing decade for many, much like 2000-2009.

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This article was written by

David Zanoni profile picture
Through diligent analysis, he is ranked in the top 1% of blogging analysts on Tipranks.com for performance and accuracy. David previously contributed to Kirk Spano's Margin of Safety Investing [MoSI] Marketplace Service and Risk Research Inc.David focuses on growth & momentum stocks that are reasonably priced and likely to outperform the market over the long-term. He is a long term investor of quality stocks and uses options for strategy. David told investors to buy in March 2009 at the bottom of the financial crisis. The S&P 500 increased 367% and the Nasdaq increased 685% from 2009 through 2019. He wants to help make people money by investing in high-quality growth stocks.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The article was written by David Zanoni for Kirk Spano's Margin of Safety Investing service [MoSI].

The article is for informational purposes only (not a solicitation to buy or sell stocks). David is not a registered investment adviser. Kirk Spano is an RIA. Investors should do their own research or consult a financial adviser to determine what investments are appropriate for their individual situation. This article expresses my opinions and I cannot guarantee that the information/results will be accurate. Investing in stocks involves risk and could result in losses.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (39)

David Zanoni profile picture
It looks like the market believes in Delta now. The stock increased significantly since mid-May with new positive momentum.
David Zanoni profile picture
I wrote this article before the impact of the COVID-19 situation was fully understood. It would probably be best to wait until the economy and travel return to normal before re-evaluating the company.
Alfred Einstein profile picture
It's almost too tempting to ignore today. They say when there's blood in the streets buy real estate... Well the friendly skies are gushing blood today. I think I might start nibbling.
High Sharpe profile picture
I never buy airlines. I'm going to buy Delta.
ATTNSC profile picture
Good news on fuel cost, per Saturday's Saudi price war declaration. If $46 per share works for Buffett, I'm in, even with the virus bad news.
zito profile picture
The market has dropped on virus fears, and will recover when news improves. Why invest in an industry hit the worst that will recover the slowest?
News getting worse. Pretty sure Luv and Dal will see a 3 handle next week.
Just cancelled my rental car. Maybe, next year. Looks like bonfires and beer this summer.
for what it is worth, decade long delta diamond flier, flew 170k miles last year. I work for a multinational tech company as do many of my friends in similar roles. for the first time since 2008-2009 we are grounded. the damage has already started and if this goes on longer it will be a massive problem for these companies. it isn't just me flying. it's our customers and our partners. it's also all the cancelled conferences. all of the P/E and dividend metrics are now worthless as earnings are going to plummet as will cash flow and ability to service debt and pay a dividend. the fact is, Corona is a massive Black swan for these companies and the only metric that matters is unknowable....how long will this last?
Very well stated.
ENG704 profile picture
@quakerpop Agree - Coronavirus is a major problem in the short run. In the Long run (5-10 years), this will pass and more people will be flying then than now. It doesn't matter what 2020 numbers look like. What is their cash flow going to be in 2025? Im willing to bet that there is a high probability that it will be higher than today. Im buying DAL at this valuation.
David Zanoni profile picture

Thank you - I was going to say something similar. The long-term is the way to look at this. The flu season is over in a couple of months and the coronavirus will probably die-off about the same time.
Having only been a dividend investor thus far, I'm intrigued by DAL at these levels, but others like SAVE have been hammered even more so lately. Out of curiosity, what would be the benefits of buying a stock like SAVE that pays no dividend over DAL that does? Just hope that share price appreciates more over time?
David Zanoni profile picture

Yes, buying Spirit (SAVE) would be in hopes of getting strong price appreciation over time. SAVE does have double-digit expected revenue growth for the next few years.
If this gets so bad that airlines fall back into the old ways of discounts then you could see losses of a magnitude that these stocks look too expensive today.

Airlines are the sector for which the term "don't catch a falling knife" has a long term historic theme and this is not the time to pretend that any understanding of what happens next is clearly understood.

In the case of cruise ships this stain on them will result in lower capacity for years and that industry will have to discount heavily to get people back on ships which now look like a prison ship if you are on the wrong cruise.
Low valuation and price on DAL, nice yield and Buffett likes the stock.
The problem with your analysis is no one can predict its earnings, only that they will be significantly lower than forecast a month ago. That will cause the PE ratio to rise (similar to what has happened at Ford).

In hindsight DAL wasted a lot of money buying $2B of Latam stock (funded with debt) that is
worth a 1/3 of its value on the market right now and did a $1B buyback in 2019 (also funded with debt) that is significantly under water. I would have been happier if Delta had a laser focus on reducing debt and increasing its credit rating for events like the virus. I give FB and GOOG credit for carrying no debt on their ballance sheets.
Tim Dunn profile picture
Delta's investment in Latam is a long term commercial partnership and not just an equity play. They expect to grow Latin revenue by $2billion per year
David Zanoni profile picture

I like FB also, but the airlines are a much more capital intensive business (all airlines carry debt as a result). Like Tim Dunn said. The Latam acquisition will play out over many years.
David, LUV has a P/E ratio much higher than Delta (10.5 vs 6.5) and has lower overall debt and debt to equity ratio. LUV has the capacity to go to market and borrow money during rainy days. Delta seems to have become more comfortable leveraging its ballance sheet this year. With its record FCF, this should not have happened. If Delta focused on improving its investment grade rating by lowering debt, I think they would be in a league closer to Southwest and rewarded more by Wall Street.
Andreas Hopf profile picture
No mention of how COVID-19 impacts the business, potentially for two full quarters?
Alfred Einstein profile picture
Why do you think the stocks are down 50% in 2 weeks? The question now is are these moves really justified, or is this a shoot first ask questions later situation? It’s starting to feel a bit overdone to me and the urge to bottom fish is growing, but these markets are too crazy to jump in front of right now, so I’m just watching in awe for something to break.
Andreas Hopf profile picture
I am content not having "bought the dip" just yet. COVID-19 has not even begun to disrupt U.S. air traffic.
Alfred Einstein profile picture
I don’t disagree, but the market is a discounting mechanism and it’s very possible it’s already discounted more damage than will actually occur. I haven’t bought the dip either, and we’ve been rewarded for that, but Delta is a strong company, this will pass, and eventually a great buying opportunity will have come and gone. It’s just a question of when and from where.
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