Last update on 2024-06-27

Southwest Airlines (LUV) - Dividend Analysis (Final Score: 5/8)

Comprehensive review and analysis of Southwest Airlines (LUV) dividend policy performance with an 8-criteria scoring, scoring 5 out of 8.

Short Analysis - Dividend Score: 5

We're running Southwest Airlines (LUV) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

The analysis evaluates Southwest Airlines' dividend policy using an 8-criteria scoring system and scores the company a 5 out of 8. Southwest Airlines has a notably higher dividend yield than the industry average, indicating strong shareholder returns. The company has shown dividend growth historically, but recent years have seen declines and suspensions, leading to concerns about consistency. The payout ratio is generally favorable, suggesting a conservative and sustainable dividend approach, but a high spike in 2023 indicates potential financial issues. Dividend coverage by cash flow is inconsistent, signaling instability. The company has paid dividends for 25 years with interruptions during the COVID-19 pandemic, which is a positive but concerning for stability. Stock repurchases have been consistent, showing a commitment to returning value to shareholders.

Insights for Value Investors Seeking Stable Income

Southwest Airlines appears to have a promising dividend policy with a high yield and a low payout ratio for most years, but recent inconsistencies raise caution. As an investor, you'd want to note the interruptions in dividend payments due to external shocks like the COVID-19 pandemic. If you can tolerate some risk and are confident in the airline's recovery plan, it might be worth looking into. However, if you prioritize stable and consistent dividend income, this stock might not be the best choice right now.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield measures the annual dividend payments to shareholders as a percentage of the stock's current price. It is critical for investors seeking income through dividends.

Southwest Airlines' (LUV) dividend yield of 3.1163% is significantly higher than the industry average of 0.74%. Historically, Southwest Airlines' dividend yield has fluctuated moderately, with substantial increases in recent years reaching 0.69% in 2013 and 1.3016% in 2018, but dropping off to zero in 2020 and 2021 amidst unique market conditions, likely due to the COVID-19 pandemic. The significant rebound to 3.1163% in 2023 illustrates a marked recovery and a commitment to returning value to shareholders. This yield outperformance relative to the industry average is positive, suggesting better shareholder returns in the form of dividends compared to peers.

Average annual Growth Rate higher than 5% in the last 20 years?

The Dividend Growth Rate (DGR) measures how much a company's dividend payments have increased over a given period, reflecting its ability to generate shareholder value.

According to the data from 2003 to 2023, Southwest Airlines achieved a compound dividend growth in some years, especially from 2012 to 2017, where it showed strong performances. However, the recent years, particularly 2019 to 2023, saw negative or zero growth, indicating the suspension of dividend payments. The average dividend ratio over this period is approximately 17.73%. While the years of positive growth are significant, the absence of continuous dividend payments and negative trends in recent years suggest instability, and thus, it is not ideal. This pattern demonstrates inconsistency and may signal risk to potential investors.

Average annual Payout Ratio lower than 65% in the last 20 years?

The payout ratio measures the proportion of earnings paid out as dividends. A lower payout ratio below 65% suggests that the company retains more earnings, likely underscoring a sustainable dividend policy and the potential for better growth and stability.

With an average payout ratio of about 12.14% over the last 20 years, Southwest Airlines (LUV) demonstrates a strong ability to retain earnings while also paying out dividends. This sustained low payout ratio is beneficial, indicating that the company is maintaining a conservative approach to its dividend distributions, favoring reinvestment into the company's operations or reserves. However, the spike to over 115% in 2023 stands out as a potential concern, suggesting a potential period of financial difficulty or extraordinary dividend issuance that year. Excluding 2023, the trend over these years is quite favorable.

Dividends Well Covered by Earnings?

dividend coverage ratio by earnings per share

Southwest Airlines' dividend coverage ratio reveals how comfortably the company can pay its dividends out of its earnings. A higher ratio generally means more secure dividends.

Dividends Well Covered by Cash Flow?

Dividends Well Covered by Cash Flow: Measures if a company generates enough free cash flow to cover its dividends. Important for assessing dividend sustainability.

Southwest Airlines' (LUV) free cash flow and dividend payout from 2003 to 2023 present a mixed picture for dividend coverage. Starting with a coverage ratio of 0.142 in 2003, several years saw negative ratios, particularly 2004 (-0.023), 2008 (-0.005), and recent years such as 2022 (-0.0) and 2023 (-1.100). Positive and improving coverage ratios were observable before the COVID-19 pandemic, peaking at 0.164 in 2015. However, inconsistent cash flow due to external shocks reflects an unstable profile. While times of strong positive ratios indicate dividend sustainability, the frequent negative coverage ratios call for caution. This inconsistency is detrimental to long-term dividend reliability.

Stable Dividends Since the Company Began Paying Dividends?

Explain the criterion for Southwest Airlines (LUV) and why it is important to consider

Stability in dividend payments, where the dividend per share did not drop by more than 20% over the past two decades, is of utmost importance for income-seeking investors.

Dividends Paid for Over 25 Years?

This criterion evaluates whether Southwest Airlines (LUV) has consistently paid dividends for over 25 years, showcasing its financial reliability and long-term commitment to returning value to shareholders. It is essential for investors who seek stable income.

The data indicates that Southwest Airlines (LUV) has paid dividends for 25 years, from 1998 to 2023, with a noticeable interruption during the years 2020 and 2021 where no dividends were paid. Despite this interruption, there is a general trend of increasing dividends per share over the 25-year period, from $0.013 per share in 1998 to $0.9 per share in 2023. The interruption in 2020 and 2021 was likely due to the COVID-19 pandemic, which severely impacted the airline industry, leading many companies to conserve cash. The resumption and significant increase of the dividend to $0.9 in 2023 suggests a strong recovery and a renewed commitment to returning value to shareholders. Overall, the trend is positive, but the interruptions highlight the impacts of extraordinary circumstances on dividend stability.

Reliable Stock Repurchases Over the Past 20 Years?

The criterion assesses whether Southwest Airlines has consistently repurchased its own shares over the past twenty years, indicating strong capital management and shareholder returns.

Southwest Airlines has demonstrated a noteworthy trend in stock repurchases over the past 20 years. Observably, significant repurchase activities occurred in 2005, 2007, 2008, and consistently from 2012 to 2019, followed by a minor backtrack in 2020 possibly due to pandemic-related financial pressures. There was a total drop in the number of shares from about 818.5 million in 2003 to approximately 595 million in 2023, amounting to an average reduction of about 1.5097% per year. This denotes a strategic approach to enhance shareholder value. The trend is overall positive, barring the necessary financial recalibrations prompted by extraordinary events like COVID-19.