United Continental (UAL) has some good news after disappointing investors and analysts with its third-quarter release. In the third quarter analyst call, United’s management avoided questions regarding its earnings initiatives and planned margin improvement for 2018. In fact, the carrier is well on its way to recording a loss in the first quarter of 2018, which is also a seasonally weak quarter for airlines.
New share buyback
United Continental’s board has approved a new share buyback program worth $3 billion—approximately 17% of the company’s market cap of $18 billion at the time of the announcement. The new buyback program doesn’t have an expiration date and may be discontinued, depending on the company’s situation.
Executive vice president and chief financial officer Andrew Levy said, “We continue to invest in our employees, our customer experience and the growth of our business. Returning cash to our shareholders reflects the strength of our balance sheet and the confidence we have in our future.”
United Airlines’ current share buyback program was approved in July 2016 and is worth $2 billion. It’s expected to be completed by December 2017.
Is it really good news?
The share buyback is good news to the extent that it means more cash in investors’ hands. It’s also a more tax-efficient way of returning money to shareholders than paying dividends.
However, share buybacks usually indicate that the company doesn’t foresee any attractive growth opportunities. Big airlines may not have significant room for growth, and returning cash to shareholders could be a better option than allocating capital to value-destroying opportunities.
Investors can gain exposure to United Continental by investing in the First Trust Nasdaq Transportation ETF (FTXR), which invests 6.5% of its portfolio in UAL. FTXR also invests 4.1% of its holdings in both Delta Air Lines (DAL) and American Airlines (AAL). It invests another 1.5% in Spirit Airlines (SAVE). Next, we look at UAL’s planned earnings initiatives in detail.