United Continental Holdings Inc (UAL) Stock Is Good … For Dividends?

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Let’s just say, this hasn’t exactly been United Continental Holdings Inc’s (NYSE:UAL) week. We’ve all seen the video of United forcefully dragging a doctor off of one of its flights so its own employees could catch a flight home. Moreover, we’ve all seen the non-response from the company in the wake of the scandal. As the world expresses its collective outrage via protests, nasty tweets and some good old fashioned trolling, UAL stock has imploded.

United Continental Holdings Inc (UAL) Stock Is Good ... For Dividends?

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United Continental tanked nearly 7% in the wake of the incident.

But that kind of drop should make some investors pretty excited. Especially those looking for future income.

The Potential for UAL Stock

When you’re looking for dividend stocks, odds are major airlines aren’t exactly at the top of your list. After all, this is the sector that has a moniker of being a “destructor of capital.” Bankruptcies, sinking stock prices and major losses have plagued many of the top carriers for what seems like decades.

But that was then, and this is now. Today, airlines like Delta Air Lines, Inc. (NYSE:DAL) and American Airlines Group Inc (NASDAQ:AAL) are profit machines. Even better is that they are handing back to those profits in a big way.

The reason why is simple. One of their main costs is basically non-existent at this point.

As prices for crude oil have cratered, so too has the cost of jet fuel. It’s the number one cost for the major airlines. And oil prices have risen in recent months — they are nowhere near as high as $100 per barrel reached just a few years ago. According to the U.S. Bureau of Transportation Statistics, a gallon of jet fuel only costs around $1.56. Back in 2013, they were paying an excess of $3 per gallon. That’s a huge difference and means some big things for the bottom line of airlines.

Moreover, many of the fees enacted during the time of high oil prices haven’t gone away. We’re still paying excess baggage fees, our drinks/snacks on board and even for pillows.

That has made the major airlines hugely profitable. And when you add in that ticket sales and air traffic has recovered since the recession, that really puts the wind beneath the airlines’ wings.

With multiple years worth of big-time profits behind them, the airline stocks have started to do something they haven’t done in decades — pay meaningful dividends. Thanks to their higher margins, the airline stocks managed to return more than $10 billion back to shareholders via dividends and buybacks in 2015. And they’ve continued to raise their payouts last year as cash flows continue to be robust.

Stocks like DAL and Alaska Air Group, Inc. (NYSE:ALK) yield nearly 2%.

United Continental Will Follow

For United Continental, the dividend story is just getting started. Despite the recent mishap, UAL is pretty darn profitable. For all of 2016, the company reported full-year net income of $2.3 billion and diluted earnings per share of $6.85. That’s right. Not only was an airline stock making money, but it made billions of dollars. This was simply the best performance in United’s history.

With its cash flows really cooking, UAL stock has been on the buyback train. However, it hasn’t indicated a dividend just yet. It’s still yielding a big fat goose egg, but the scandal should change that.

Given that it has the ability to pay one, I’d be willing to bet that it does so rather quickly. Investors’ confidence after the incident has been rattled. What better way to show your love than handing over some cold hard cash? Management has to be seriously considering doing just that. They were considering it before, why not strike when the iron is hot?

As for keeping that dividend going, UAL stock should have no issues. While the scandal may drop bookings in the near-term, with less and fewer carriers to choose from, United should have no trouble regaining lost customers from the incident. And with crude oil and various labor issues behind it, the company’s margins and cash flows should continue to be robust.

Buying the Future Dividend At UAL

For income seekers, that poses an interesting play in UAL stock. The ability and need to pay a dividend is there. There’s a good chance United could start paying one as early as next earnings announcement.

With the recent drop in shares, there’s an opportunity to snag up UAL stock at a discount to its peers. The airlines have been on fire as of late — driving by the higher margins, profits and Warren Buffett’s love of the sector.

In the end, United has the ability to be one of the biggest dividend growth stories in the sector. The recent overbooking incident provides an inroads for investors to snag that potential.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Aaron Levitt is an investment journalist living in Ohio. With nearly two decades of experience, his work appears in several high-profile publications in both print and on the web. Also likes a good Reuben sandwich. Follow his picks and pans on Twitter at @AaronLevitt.


Article printed from InvestorPlace Media, https://investorplace.com/2017/04/united-continental-holdings-inc-ual-stock-dividends/.

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