Is United On Track To Begin Paying Dividends In The Near Future?

As U.S. airlines have grown their profits over the last few years, they have increased focus on returning cash to shareholders. Accordingly, many U.S. airlines including Delta (NYSE:DAL), Alaska (NYSE:ALK) and American (NASDAQ:AAL) have started paying dividends and buying back shares in the past couple of years. Southwest on the other hand never stopped paying dividends to its shareholders since it started paying them in the late 1980s. The only big name that is missing from this list of airlines that are paying dividends to their shareholders is United Continental (NYSE:UAL). Though, United has a $1 billion share buyback program, which was launched in July this year after the airline posted better than expected profits in the second quarter. ^[1] Here we analyse if United can in the near future join Southwest, Delta, Alaska and American in the list of airlines that are paying dividends to their shareholders.

In our opinion, United is on the right track, as it is steadily growing its profit and reducing its debt and pension liabilities. Even though the carrier is behind its peers – Delta and American – when it comes to profit and cash flow generation, it is possible that United could begin paying dividends to its shareholders in the near future.

We currently have a stock price estimate of $49.50 for United, around 15% below its current market price.

See our complete analysis of United here

Greater Cash From Operations Will Leave United With Greater Cash To Distribute Among Shareholders

Over the last couple of years, United has taken many steps to improve its margin and profit. The carrier launched measures to reduce its operating costs across many heads which included fuel consumption, maintenance, productivity, distribution and sourcing. Gains from these cost reduction measures are expected to save approximately $300 million in non-fuel costs and $200 million in fuel costs for United in 2014. ^[2] As a result, United’s 2014 profit is expected to grow significantly from 2013. In the first three quarters of this year, the carrier has already been able to nearly double its profit (excluding special items) to about $1.5 billion, on a year-over-year basis. ^[3]

This improving profit is enabling United to strengthen its balance sheet. The carrier has been able to steadily lower its debt burden, bringing down its total outstanding debt (which includes annualized aircraft rent) to $18.4 billion at the end of the third quarter, from $20.1 billion at the end of 2012. United targets to eventually bring down its total outstanding debt to about $15 billion. At the same time, contributions to pension liability have reduced United’s unfunded pension liability to $1.5 billion at the end of the third quarter, from $2.4 billion at the end of 2012. ^[2] Overall, these declining debt and pension liabilities mean that United will have greater cash in its hand in coming months to distribute among shareholders.

Currently, United plans to spend about $2.8-3 billion per year on capital investments such as new airplanes and lounge facilities, among others. ^[2] The carrier has also promised to return $1 billion to shareholders through buybacks till mid 2017. It will also need to make contributions towards further lowering its debt and pension liabilities. However, inspite of these fixed heads that take priority over dividend payments, United could begin paying dividends in near future as it is generating greater cash then before from its operations. In the first nine months of 2014, the carrier has been able to generate an impressive $2.7 billion in cash from operations, up from $1.4 billion that it generated in whole of 2013. ^[3] Thus, as cash inflow is growing while payment towards lowering debt and pension liabilities is declining, we figure it is a matter of time before United starts paying dividends. In addition, the fact that all other major airlines are already paying dividends will likely compel United’s management to start paying dividends as soon as the company is in a position to do so.

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1. United’s 2014 Q2 earnings form 8-K, July 24 2014, www.unitedcontinentalholdings.com [↩]
2. United’s presentation at Raymond James 2014 Global Airline/Transportation Conference, November 6 2014, www.unitedcontinentalholdings.com [↩] [↩] [↩]
3. United’s 2014 Q3 10-Q, Oct 23 2014, www.unitedcontinentalholdings.com [↩] [↩]