I realized things got interesting Wednesday afternoon when I checked in on the markets and saw that they were in midst of a precipitous decline for the day. I keep a lengthy list of stocks on my watch list and whether the markets panic for one day or weeks on end, I have always made sure to have a pile of cash handy to take advantage of perceived price discrepancies. From this watch list, I always have an even shorter list of stocks that are presently in or are nearing a valuation range where I would be willing to initiate a new position (or add to an existing position) should the right price present itself. I think this is a pretty typical characteristic of any self directed long term investor. Well, on Wednesday, the stock I decided to pull the trigger on was DAL. The stock has retreated back to the low $50s and I have decided the value offered for the price provides and adequate margin of safety. See below for the details of the purchase, some metrics, and additional commentary.
Purchased: 50 shares x $50 = $2,500 (+$4.95 commission)
Dividend Income: $70.00 annually ($1.40/sh annually; paid quarterly in Mar, Jun, Sep, Dec). In recently years it appears to be some variability in the timing of the dividend between certain months of the year.
Forward P/E vs. S&P Forward P/E: 7.5 vs. 17.8 for S&P (per WSJ)
Debt to capital < 50%: Yes, 43.5%
Interest coverage ratio of at least 3:1: Yes, 15.4x
S&P and/or Moody's credit rating of BBB+/Baa1 or better: No, BBB-/Baa3 (stable outlook)
Current dividend yield > 1.5x S&P yield: Yes, 2.8% vs. S&P 1.9%
Payout ratio < 60% (or <85% for utilities): Yes, 29.9%. Per Fidelity's website, DAL's 5 year dividend growth rate is 42.3% and it most recent increase in 2018 was 14.75%. Despite the rather large dividend rate increases in recent years, there remains plenty of room to keep increasing these rate by double digits for the next few years.
Dividend King or CCC classification: Challenger (6 years of consecutive dividend increases)
Comments: Delta meets all the criteria above with the exception of their current credit rating, which no doubt plays a factor in the market's rather low P/E valuation among other factors. Those who have been alive for more than a few decades likely remember the trouble the industry had going back a little over 10 years now. In 2005 DAL actually filed for BK and subsequently reemerged from BK in 2007. Not too long afterwards DAL merged with Northwest Airlines in 2008 and which briefly made it the number one carrier in the US before it was bumped to third place once further consolidation within the industry took place. Since 2008, DAL has made drastic strides in reducing its outstanding debt (from $15.8B in 2010 to $8.8B in 2017). Despite the consolidation in the industry, according to analysts, competition remains strong and competitors still compete on price. However, regulations and capital intensive nature of the industry (commercial jets are expensive to buy and maintain) create high barriers to entry effectively creating a very narrow moat for DAL and other major airlines in my opinion. What is more, DAL has a goal of returning 70% of free cash flow (FCF) to shareholders. This information presented above along with the outlook of the industry over both the near terms and long term the value received for the price paid appears to correspond with the following equation: benefits > risks.
Purchased: 50 shares x $50 = $2,500 (+$4.95 commission)
Dividend Income: $70.00 annually ($1.40/sh annually; paid quarterly in Mar, Jun, Sep, Dec). In recently years it appears to be some variability in the timing of the dividend between certain months of the year.
Forward P/E vs. S&P Forward P/E: 7.5 vs. 17.8 for S&P (per WSJ)
Debt to capital < 50%: Yes, 43.5%
Interest coverage ratio of at least 3:1: Yes, 15.4x
S&P and/or Moody's credit rating of BBB+/Baa1 or better: No, BBB-/Baa3 (stable outlook)
Current dividend yield > 1.5x S&P yield: Yes, 2.8% vs. S&P 1.9%
Payout ratio < 60% (or <85% for utilities): Yes, 29.9%. Per Fidelity's website, DAL's 5 year dividend growth rate is 42.3% and it most recent increase in 2018 was 14.75%. Despite the rather large dividend rate increases in recent years, there remains plenty of room to keep increasing these rate by double digits for the next few years.
Dividend King or CCC classification: Challenger (6 years of consecutive dividend increases)
Comments: Delta meets all the criteria above with the exception of their current credit rating, which no doubt plays a factor in the market's rather low P/E valuation among other factors. Those who have been alive for more than a few decades likely remember the trouble the industry had going back a little over 10 years now. In 2005 DAL actually filed for BK and subsequently reemerged from BK in 2007. Not too long afterwards DAL merged with Northwest Airlines in 2008 and which briefly made it the number one carrier in the US before it was bumped to third place once further consolidation within the industry took place. Since 2008, DAL has made drastic strides in reducing its outstanding debt (from $15.8B in 2010 to $8.8B in 2017). Despite the consolidation in the industry, according to analysts, competition remains strong and competitors still compete on price. However, regulations and capital intensive nature of the industry (commercial jets are expensive to buy and maintain) create high barriers to entry effectively creating a very narrow moat for DAL and other major airlines in my opinion. What is more, DAL has a goal of returning 70% of free cash flow (FCF) to shareholders. This information presented above along with the outlook of the industry over both the near terms and long term the value received for the price paid appears to correspond with the following equation: benefits > risks.
No comments:
Post a Comment