uploads///DAl reducing debt

Delta’s Strong Cash Flow Helps Share Buybacks and Dividends

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Apr. 28 2015, Updated 6:06 p.m. ET

Strong cash flows

Delta Air Lines (DAL) generated strong cash flows of ~$500 million in 1Q15, which is seasonally a weak quarter for DAL. The company expects to generate cash flows to the tune of $4–$5 billion after capital expenditures. DAL has been making efficient use of its cash flow to reduce debt and at the same time repay shareholders through dividends and share repurchases.

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Reducing debt

For the last ten quarters, Delta Air Lines (DAL) has managed to reduce its debt from $12,829 million in 4Q12 to $9,566 million in 1Q15. Net debt decreased to $7,400 million at the end of 1Q15, which has resulted in $55 million saving in interest expense in 1Q15.

Delta Air Lines (DAL), United Continental Holdings (UAL), and American Airlines (AAL) have high leverage, or debt as a percentage of capital, of 45%–70%. Southwest Airlines (LUV) and Alaska Air Group (ALK) have lower leverages of 25%–30%.

Increased dividend payout

Improved cash flows and reduced expenses have given Delta the ability to pay higher dividends to shareholders. It has thus increased its dividend payout by 50% to $0.09 from 3Q14. This has increased dividend yield from 0.52% in 1Q14 to 0.73% in 1Q15.

Share buybacks

In 2014, the DAL board of directors approved a new $2 billion share repurchase program to be completed before December 31, 2016. During the first quarter of 2015, Delta bought back shares worth $425 million and retired 9.3 million shares. This totals 30.6 million shares bought back at a total cost of $1.3 billion.

Investors who want to participate in growth of airline companies can do so through ETFs such as the iShares Transportation Average ETF (IYT) and the SPDR S&P Transportation ETF (XTN), which hold some of these airline stocks.

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