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How Much Can—or Will—Southwest Airlines Increase Its Dividend Payouts?

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Southwest Airlines has been consistent on dividends

Southwest Airlines Company (LUV) is the only airline to have paid dividends consistently since 1980. The airline has, in fact, been raising its dividend payouts for the past four years. By contrast, most of its industry peers do not pay dividends at all, and the ones that do have only started doing so recently.

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Southwest has the lowest dividend yield

Southwest has one of the lowest dividend yields among industry peers. The company’s current dividend yield stands at 0.77%. By comparison, Alaska Air Group (ALK) has the highest dividend yield in the industry at 1.6%, followed by American Airlines Group’s (AAL) dividend yield of 1%. Delta Air Lines (DAL), too, has seen a similar dividend yield of 1%.

Southwest Airlines makes up approximately 5% of the total holdings of the Dynamic Leisure & Entertainment Portfolio (PEJ).

Cash dividend coverage ratio

Southwest Airlines’ cash dividend ratio stood at a strong 12x at the end of 3Q15. This level indicates the company’s ability to sustain dividend payouts. The ratio is calculated as cash flows over dividends paid, and it measures the ability of the company to pay dividends. A ratio of less than one indicates dividend payouts higher than the company’s cash flows, which may be difficult to sustain in future.

Can dividend payouts increase?

Southwest has a history of increasing dividend payouts. However, more recently, the company has allocated higher capital for share buybacks than it has allocated to paying dividends.

Southwest Airlines’ (LUV) dividend payout ratio now stands at around 8%–10%. Given the company’s increasing earnings, investors can likely expect to see an increase in dividends, though these may not be substantial.

Now let’s take a close look at analyst estimates for Southwest Airlines in 2016.

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