Southwest Doubles Down on Its Dividend

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Don't look now, but the airline industry is becoming more optimistic about its future. The latest positive move in the business is Southwest's (NYS: LUV) dividend hike. The discount carrier will more than double its quarterly payout, to $0.01 from the previous $0.0045. Although that's certainly not going to make anyone a millionaire overnight, it's a sign that Southwest in particular might be seeing bluer skies ahead. But will competing discounters darken the company's skies?

Sunnier weather
Southwest's double comes at a time of general optimism for the company. In spite of the usual tough conditions for the industry (high fuel prices, a strict regulatory environment, labor squabbles, etc.), it's managed to eke out a net profit in the past few quarters and in its latest fiscal year. This is more than can be said for several of its full-fare rivals such as United Continental (NYS: UAL) and the nose-diving AMR (OTC: AAMRQ), operator of American Airlines.

Meanwhile, all seems to be quiet on the labor front for now, following Southwest's tentative agreement with the union representing its dispatchers. Financially, those recent profits have added enough to the firm's coffers to spare a little change for the payout and accompanying share buyback program -- at the end of its most recent quarter, the company had over $1.5 billion in cash.


Dropping altitude
The company surely hopes the dividend boost and the stock buyback will help lift its shares, which are flying lower by 4% since the start of the year. These moves will also help distinguish its stock from that of the competition; at the moment, no other major listed airline offers a dividend. So by contrast, one penny per share is actually a generous payout.

Southwest also needs to add shareholder value to stay ahead of the other discounters nipping at its heels. Small but determined Spirit Airlines (NAS: SAVE) has recently been posting fatter net margins than its rival -- at around 7% to 8% -- and in its most recent quarter grew revenue by 30% over the previous quarter. Allegiant (NAS: ALGT) , an even smaller but longer-standing operator, has also posted Southwest-beating margins and has seen a nice quarter-over-quarter revenue climb of 23%.

By contrast, in its most recent quarter Southwest's net margin stood at 2.5%, though the company was able to increase first-quarter revenue by 29% from a year ago.

A crowd at the departure gate
Southwest has a bunch of positives going for its business -- it generally enjoys a good reputation among travelers, and it's now entering a relatively turbulence-free period in terms of labor relations. Its efforts to bolster its stock will probably attract a few investors and boost the share price a bit. In the long term, though, it should keep a wary eye on the skies around it. Low-cost competitors are buzzing, and they won't fly away anytime soon.

On the subject of fuel costs, in a certain environment they might climb as high as one of Southwest's planes. If that happens, we've got a few oil stocks that should rise along with those costs. Read all about it in our FREE report "3 Stocks for $100 Oil." The report can be downloaded here.

At the time this article was published Fool contributor Eric Volkman owns no stocks mentioned in the story above. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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