A dividend and share buyback program provides direct benefits to shareholders by proving regular income and better returns on investment
Stock dividends and share repurchases are generally declared by companies with excess cash after meeting working capital requirements, investments in expansion plans, and debt obligations. This excess cash is called “free cash flow” and is available to equity holders. Delta’s (DAL) operating cash flow is high ($4.5 billion) compared to its peers, so it manages to have a positive free cash flow even after meeting its capital expenditure ($2.57 billion). Capital expenditure is generally high in the airline industry. Delta manages to keep it low through its strategy of buying used aircraft.
In 2013, the cash generated from the operation of Delta’s competitors was as follows.
- American Airlines (AAL)—$1.44 billion
- United (UAL)—$0.68 billion
- Jet Blue (JBLU)—$0.76 billion
- Southwest (LUV)—2.48 billion
- Dividend: Dividends provide investors with regular income, so investors are attracted to dividend-paying shares. Delta declared its intension to increase its dividend by 50% to $0.09 per share from the current $0.06 per share from September 2014.
- Share buybacks: Share buybacks result in accretion of EPS (earnings per share) resulting from a decreased number of shares, which in turn can increase share prices. In addition to declaring dividends, Delta has scheduled a $2 billion share repurchase program to be completed by 2016.
Indirect benefits to shareholders through reduced risk and leverage levels
Shareholders can expect to indirectly benefit from Delta’s planned accelerated debt reduction program. Delta’s debt adjusted for operating leases has decreased by 40% from 21.7 billion in 2009 to 12.8 billion in 1Q14, and the company targets reaching adjusted net debt of $5 billion in 2016. Debt reduction will result in reduced interest expenditure, increasing earnings and share prices. Moreover, investors’ confidence in the stock should increase as debt levels decrease and leverage ratios improve.