Southwest Airlines Co. (LUV): This Airline Company Is Worth Buying

Page 2 of 2

The carrier further indicated that it will use $250 million of its remaining authorization for an accelerated share buyback. Taking the roughly 723 million shares of Southwest Airlines into account, the carrier will pay around $29 million to its shareholders every quarter, or $126 million every year. It also raised the quarterly dividend from $0.01 to $0.04 per share, for a yield of just over 1%.

Its major rivalry, Delta Air Lines, Inc. (NYSE:DAL), recently disclosed its new capital deployment plan. It involves another $5 billion reduction in net debt from 2012 levels over the next five years and includes a $1.1 billion return of capital to shareholders over the next three years through a dividend of $0.24 per share,  resulting in a dividend yield of 1.30%. Additionally, the board has also authorized a $500 million share repurchase program.

These steps from two of the largest U.S. carriers to return significant portions of their cash flow to shareholders points towards the improving financial health of the U.S. airline industry. These two companies, in combination, could return $500 million to $600 million to their shareholders, which is around 20% more than the $450 million in total capital return that analysts expected in 2013.

Intense competition

The airline industry is highly competitive because of low entry barriers. Southwest Airlines Co. (NYSE:LUV) faces intense competition from American Airlines and Delta Air Lines, Inc. (NYSE:DAL). These carriers have more extensive domestic and international route structures than Southwest Airlines and AirTran. Prior to the economic downfall in November 2011, AMR (NASDAQOTH:AAMRQ), which is the parent company of American Airlines and American Eagle, took advantage of reorganization in bankruptcy to reduce operating costs through renegotiated labor, supply, and financing agreements by filing for Chapter 11 reorganization.

In addition, the International Air Transport Association, or IATA, has also warned that the competition in the North American region will further grow as American Airlines evolves with a more competitive cost structure due to the bankruptcy filing. This is a threat for low-cost carriers like Southwest Airlines, whose cost advantage is slowly declining as heavy fuel bills and labor costs demand regular fare hikes.

Conclusion

No doubt, Southwest is facing tough competition from Delta Air Lines and American Airlines, but it stands strong due to aggressive buybacks and an attractive dividend policy. Added to it, the AirTran integration has also opened various opportunities for Southwest Airlines Co. (NYSE:LUV) in domestic and international markets.

Southwest’s U.S. market share rose from 14.4% in 2008 to around 18.7% in 2012, and the AirTran integration will further increase its market share. Southwest Airlines is a wonderful company for long-term growth, followed by Delta and American Airlines. I recommend buying all three of these stocks.

Ranu Devi has no position in any stocks mentioned. The Motley Fool recommends Southwest Airlines. Ranu is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article This Airline Company Is Worth Buying originally appeared on Fool.com and is written by Ranu Devi.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Page 2 of 2