What Could Drive Southwest’s Dividends?



What drove the revenue growth?

Southwest Airlines Company (LUV) has five-year dividend growth of 87%. The company has also maintained an impressive free cash flow balance. The company has consistently recorded operating revenue growth in the last five years. Operating revenue grew 3% and 4% in 2016 and 2017, respectively.

Attractive fares, strong customer service, and growth in business and holiday season travel have been the key revenue drivers for the company. Rapid Rewards and EarlyBird revenues played a key role in driving revenue in the 2017 peak season. New international flights further enhanced the growth trajectory.

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What led to the decline in EPS?

Operating expenses rose 6% in both 2016 and 2017, which led to a 9% and 7% drop in operating income for 2016 and 2017, respectively. Other expenses decreased 67% in 2016 before rising 24% in 2017. As a result, net income grew 1% in 2016 before falling 11% in 2017. Lower fuel costs acted as a key profit driver. Earnings per share (or EPS) gained 7% in 2016 before shedding 7% in 2017. Share buybacks enhanced the EPS numbers.

How did dividend and prices perform?

A PE of 9.6x and a dividend yield of 0.9% compares to a sector average PE and a dividend yield of 11.3x and 1.1%, respectively. The dividend yield remained below the 1% mark due to price gains offsetting the impact of dividend growth. The dividend yield has grown in 2018 due to the price loss. The price loss was driven by the announcement of a capacity expansion plan by a peer.

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What will drive operating revenue and EPS growth?

The tax reform is expected to offset the effect of rising costs associated with recovery in fuel prices. Improving fundamentals and demand for low fares will continue to drive the demand for the company. The company is planning to start operations in Hawaii. However, competition continues to intensify. The company expects operating revenue to grow 7% to $22.6 billion in 2018. The company expects EPS to grow 41% to $5.

Dividend ETFs with exposure to Southwest Airlines

The First Trust NASDAQ Rising Dividend Achievers ETF (RDVY) has a PE of 15.7x and a dividend yield of 1.2%. The WisdomTree U.S. Dividend Growth Fund (DGRW) has a PE of 20.3x and a dividend yield of 2.5%.


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