Southwest’s stock price has increased by 63.2% as the share price closed at $30.82 on August 18, 2014 from $18.8 in the beginning of the year. Apart from capital appreciation Southwest’s shareholders have also benefitted from a 50% increase in quarterly dividend from $0.04 per share to $0.06 per share from 2Q14. Southwest had earlier repurchased 126 million shares under its $1.5 billion share repurchase program that was completed in May 2014. A new $1 billion repurchase program was authorized thereafter. The company had invested $220 million by the end of the second quarter to repurchase almost seven million shares under the new program. During the first half of the year, Southwest repurchased $555 million of common stock. With the reduction in outstanding shares, the program will result in improved earnings per share.
Southwest’s valuation also looks attractive as it has the lowest EV/EBITDAR multiple of 6.48 compared to Delta’s (DAL) 6.69, United’s (UAL) 8.22, American’s (AAL) 6.59 and JetBlue’s (JBLU) 6.57. EV/EBITDAR is an appropriate valuation multiple for airline companies as it is neutral to each company’s capital structure and leasing decisions hence draws a more meaningful comparison between companies compared to the P/E ratio. Moreover, increase in overall efficiency is reflected in Southwest’s 2Q14 return on invested capital which doubled to 17% from 8.5% in 2Q13. This was primarily due to a 93% increase in adjusted operating income although part of it was also due to a reduction in invested capital. To add to the returns for capital providers and investors and strengthening its balance sheet and financial position is low levels of leverage combined with adequate liquidity, lowering risks to investors.