Delta Air Lines Inc. (DAL:US) plans to return $1 billion to investors by repurchasing stock and restarting its dividend after a decade-long break (DALRQ:US) punctuated by bankruptcy and the biggest acquisition in its history.
About half that amount will be through a buyback program over the next three years, while the quarterly dividend of 6 cents a share will be payable Sept. 10 to shareholders of record as of Aug. 9, Atlanta-based Delta said today.
Delta, whose stock rose to the highest price in more than five years, will be the only full-service U.S. carrier with either a buyback program or dividend. Since it last gave cash to investors in 2003, Delta posted six annual losses and went through bankruptcy, then bought Northwest Airlines Corp. and slashed its debt by almost half.
“The goal is that as we grow the enterprise, that the dividend hopefully can grow as well,” President Ed Bastian said today in a telephone interview. There may be opportunities for more buybacks, he said.
Delta jumped 3.2 percent to $18.66 at the close in New York, the highest since December 2007. The shares have gained 57 percent this year, outpacing a 44 percent advance for the Bloomberg U.S. Airlines Index.
The world’s second-largest carrier paid its last dividend in 2003, and hadn’t repurchased stock since 2000.
Investor feedback prompted Delta’s decision to start both a dividend and a buyback program, Bastian said, with a “fair number” of shareholders lobbying for each method.
“We felt it important to establish a dividend as a permanent form of quarterly return that investors could count on, and which over time we can continue to build on,” Bastian said. “On the buyback, we feel our stock is undervalued and wanted to reward shareholders by taking advantage of that.”
Delta also set a new target today for lowering its adjusted net debt to $7 billion, from $10 billion previously. Four years ago, Delta’s debt was $17 billion.
The goal will reduce interest expense by almost half, to $500 million a year, Delta said today in a regulatory filing. The airline will also make “opportunistic incremental” pension funding contributions of up to $1 billion.
Delta’s stronger financial position may yield boosts from credit ratings companies in coming years, Chief Financial Officer Paul Jacobson said in a telephone interview.
“We meet with them regularly, and I think they’ve begun to notice the consistency on cash generation, what we’re doing on leverage,” Jacobson said. “We believe we’ve put a pretty compelling case forward.”
Moody’s Investors Service Inc. said the dividend and buyback are negative for Delta’s credit profile while the balance sheet still has “elevated” debt. Moody’s rates Delta as B2, five steps below investment grade.
Delta would like to be considered for addition to the Standard & Poor’s 500 Index, Bastian said. Currently, Southwest (LUV:US) Airlines Co. is the only air carrier included.
Since boosting its global network with the acquisition of Northwest Airlines in an all-stock deal in 2008, Delta has focused on reducing debt and lowering other costs by buying used airplanes such as Boeing Co. (BA:US) 717s from Southwest. Last year Delta purchased a jet-fuel refinery from ConocoPhillips (COP:US) to help control fuel expenses.
Southwest, the world’s largest discount carrier, is the only other major U.S. airline paying a dividend and it also has a buyback program.
Competitors such as United Continental Holdings Inc. may follow in Delta’s footsteps, said Andrew Davis, transportation equity analyst at Baltimore-based T. Rowe Price Group Inc., the mutual fund company that manages $577 billion in assets including Delta and other U.S. airline stocks.
“Delta is making the first step at the vanguard of this process of returning cash to shareholders,” Davis said. “They’re protecting the capital more, and making these things real businesses.”
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