Southwest Airlines (NYSE:LUV) quadrupled its quarterly dividend payout to 4 cents a share from 1 cent a share in an announcement Wednesday. The low-cost carrier also authorized an additional $500 million to its share buyback program, taking its program’s total buyback authorization to $1.5 billion. Of this, Southwest has used $725 million to date and has an authorization worth $775 million left to repurchase its stock. The carrier further indicated that it will use $250 million of its remaining authorization for an accelerated share repurchase. 
This decision from Southwest comes on the heels of Delta announcing the restart of its dividend program. Last week, Delta announced a quarterly dividend payout of 6 cents a share to its shareholders and authorized stock repurchases worth $500 million.  These steps from two of the largest U.S. carriers to return significant portions of their cash flow from operations to shareholders point to the improving financial health of the U.S. airline industry.
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We currently have a stock price estimate of $14 for Southwest, marginally below its current market price.
Southwest Raises Dividend
Southwest will pay the hiked 4 cents a share in quarterly dividend on June 26 to its shareholders on record as of June 5, 2013. Taking the roughly 723 million shares of Southwest into account, the carrier will pay around $29 million to its shareholders every quarter or $126 million every year.  In comparison, Southwest had generated a profit of $421 million last year. 
Rising Profits At Most U.S. Airlines
Just a few years ago, the return of such significant amounts by airlines to their shareholders seemed quite remote. However, the growing demand for flights driven by the economic recovery from the financial crisis less competition in the airline industry resulting from consolidation drove up profits at most carriers.
Although Southwest had continued to pay dividends even during the peak of the economic crisis in 2008-09, this raise in its dividend payouts to a respectable (by airline industry standards) yield of around 1% was driven by its earnings growth during 2009-12. At the same time, the initiation of dividends from Delta last week at a yield of nearly 1.2% could have catalyzed Southwest’s decision to hike its dividends.
Looking ahead, Southwest and Delta will likely be able to continue to pay dividends at these levels to their shareholders at least for the foreseeable future, as demand for flights is holding steady and fuel prices are not expected to rise significantly. Also, the addition to the industry’s flying capacity is happening in a disciplined manner which will ensure healthy occupancy rates across airlines. Low-cost carriers like Southwest are adding flying capacity at slower rates while legacy carriers like United (NYSE:UAL), American and Delta (NYSE:DAL) are either reducing or keeping their flying capacity flat.
At present, apart from Southwest and Delta, Alaska Airlines (NYSE:ALK) is the only other U.S. carrier that returns cash to its shareholders through share repurchases, but it does not have a dividend program yet.Notes: