American To Pay Dividend & Buyback Stock As Its Q2 Profit Touches A Record $1.5 Billion

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American Airlines (NYSE:AAL) announced to initiate dividend payments and stock buybacks as it posted a record second quarter profit (excluding special items) of $1.5 billion. [1] This impressive profit performance from the carrier in the second quarter was driven by its strong top line growth. During the quarter, American expanded its flying capacity by about 3% annually to take advantage of the growing demand for flights in the domestic U.S. market and on many international routes. This increased supply of seats from the carrier helped grow its passenger traffic. Additionally, American’s second quarter passenger yield increased sharply indicating that the carrier likely raised its passenger fares on many routes during the past year. All in all, driven by higher passenger traffic and higher passenger yield, American’s top line rose strongly by about 10% annually to $11.4 billion in the second quarter. [1]

The carrier’s second quarter GAAP profit, which includes special items, also rose to a record $864 million. [1] This is the highest profit reported by any U.S. airline in the second quarter. American’s nearest competitors, United (NYSE:UAL) and Delta (NYSE:DAL), posted second quarter profits of $789 million and $801 million, respectively. [2] [3] In our opinion, it is highly impressive that American has been able to grow its profits to the top of the table so soon after bankruptcy. The carrier emerged from bankruptcy in December last year through a merger with US Airways.

We currently have a stock price estimate of $39.50 for American, marginally below its current market price. We are in the process of incorporating American’s second quarter results, and shall update our analysis shortly.

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See our complete analysis of American here

Solid Profits & Cash Flows Enable American To Start Returning Cash To Its Shareholders

Around the middle of last year, Delta and Alaska started paying dividends to their shareholders. Prior to the second quarter earnings announcement, it was anticipated that American too would begin returning cash to its shareholders sometime in the future after it pares down its debt. But, the carrier made a surprise announcement in the second quarter results of starting dividends from August and buying back shares worth $1 billion through 2015. [1] In our opinion, as American still has significant debt and pension obligations on its balance sheet, it will have to maintain its strong profits and cash flows to achieve the targeted capital return to its shareholders. The carrier will make the first dividend payment of 10 cents a share to its shareholders around mid-August. This translates to a healthy annual yield of about 1%, if the carrier maintains this 10 cent per share payout over the next three quarters. The last time that American paid dividend was in 1980.

In its capital deployment plan announced along side the second quarter results, American also said that it will prepay $2.8 billion of its debt and lease obligations by the end of 2014. The carrier will also make additional pension contribution of $600 million in 2014 – above the $120 million minimum pension contribution required from the carrier in 2014. [1] Looking ahead, for American to meet these obligations, it is necessary that it maintain its solid first half profit performance in the second half. And, we figure with the stable outlook for air travel demand and jet fuel prices, American will likely be able to sustain its impressive profit performance in the second half of 2014. The carrier will also benefit from its growth oriented capacity stance. Currently, American plans to continue expanding its flying capacity in the second half, such that its full year 2014 capacity will be up around 2.5% year-over-year. [4]

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Notes:
  1. American’s 2014 Q2 earnings form 8-K, July 24 2014, www.aa.com [] [] [] [] []
  2. United’s 2014 Q2 earnings form 8-K, July 24 2014, www.unitedcontinentalholdings.com []
  3. Delta’s 2014 Q2 earnings form 8-K, July 23 2014, www.delta.com []
  4. American’s 2014 Q2 July investor relations filing, July 24 2014, www.aa.com []