In Flight: Alaska Air and Southwest

08/17/2017 2:52 am EST


Richard Moroney

Editor, Dow Theory Forecasts

With interest rates historically low, high yield stocks still have a lot of appeal for income investors. We screened for A-rated stocks sporting dividend yields above their historical norms. Two of our favorite picks are in the airline sector, states Richard Moroney, editor of Dow Theory Forecasts.

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Admittedly, airlines aren’t known for their big cash payouts to investors. But Alaska Air Group (ALK) has a  dividend that looks attractive relative to both the industry and its own historical norms.

Alaska has grown its dividend at an annualized rate of 37% over the past three years, pushing its yield to 1.4%, up from a three-year average of 1.2%.

Dividend paying airline stocks in the S&P 1500 Index average yields of 1.3% and three-year dividend-growth rates of 28%.

Airline stocks have slumped an average of 5%, partly on renewed worries about price competition. Like other airlines, Alaska has seen its profit growth constrained by higher costs. But its operating momentum is holding up better than most of its peers, helped by the $2.6 billion acquisition of Virgin America in December.

Alaska Air’s per-share profits are down just 1% for the 12 months ended June, while sales rose 21%. As an industry, airlines are averaging 15% lower profits and 6% higher sales.

Alaska Air said traffic rose 6.6% in July, while capacity expanded 6.4%. Load factor, a key efficiency metric for airlines, improved to 87.0% from 86.8% last July. Alaska Air is a long-term buy.

Rising fuel and operating costs have squeezed Southwest Airlines’ (LUV) profit margins in each of the past four quarters. As a result, its per-share profits fell 16% in the 12 months ended June.

But sales climbed 3% and cash from operations 1% during that period. Encouragingly, management said cost pressures should begin to ease in the second half of the year and could decline in 2018.

Additionally, Southwest’s traffic increased 6.0% in July, ahead of its 5.5% capacity growth. The load factor improved to 87.3% from 86.9% a year earlier. The company also reiterated that unit revenue should grow about 1% in the September quarter. Shares rose on the report.

Southwest hiked its dividend 25% in the June quarter, the fifth straight year its annual dividend increase has met or exceeded 25%. Its annualized dividend growth rate stands at 78% over the past five years, ranking among the highest 2% of our research universe.

Southwest dedicates just 15% of earnings to its dividend, allowing plenty of flexibility for future growth. Southwest, yielding 0.9%, is a long-term buy.

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