Delta Air Lines, Inc. (NYSE:DAL) continues to fly low even while the market rides high. You wouldn’t believe that if you looked at, say, a 10-year chart of Delta stock price. Its value exploded in 2012-2014 as analysts realized the return of airlines to profitability was a real thing.
But since the start of 2015, Delta stock is up just 15%, while the broader markets have flown higher and faster.
The result has been earnings “compression,” with the price to earnings ratio on Delta stock falling to 11, even while it has more than tripled the quarterly dividend from 9 cents per share to 30 cents.
What this tells us about the general health of the stock market is not good.
Delta Stock Should Be Flying High
Delta stock hit an all-time high of over $60 per share on January 16 and opened for trade March 20 at about $56 per share.
DAL hit this high the week after reporting earnings of 96 cents per share on revenue of $10.2 billion. Expectations for Delta’s next quarter, due to be reported April 12, are modest, 73 cents per share of earnings on $9.79 billion of revenue. That would represent a decline of 10% on the bottom line from a year ago, with revenue up about 8%.
Delta has responded to its lack of growth by becoming a yield stock. It has increased its dividend, which is still just one-third of those earnings. Even though the yield has been rising, it’s still modest — 2.16% if the current dividend rate continues through the year on the $56 per share stock price.
But absolute yield isn’t the measure of a dividend stock. A stock with a rising dividend is worth more than one with a stable yield. A stock that’s rising with a rising dividend should be worth even more money. A year ago, Delta was trading at about $45 per share, now it’s at $56 (after a fall).
What should be kicking in right now are your instincts for a bargain. Delta Air Lines is a bargain. But it’s not trading like one. It hasn’t been doing so for some time.
Anticipating the Cycle
The failure of Delta stock to fly in the face of good news has nothing to do with the small tax break Georgia legislators pulled from it for withdrawing discounts from the NRA. DAL shares are up 5% since that news came out.
The Dow Jones Transport Average, however, peaked on January 8 and opened for trade March 20 almost 10% below that peak. The transports are mirroring the action in Delta stock, showing a rising stock market that is on the defensive.
Airlines, like other transports, are cyclical stocks. They rise sharply as economic growth accelerates, and may hit the brakes as it decelerates, because they’re bound to fall hard when growth turns negative.
What the market seems to be saying, then, is that it doesn’t expect the good times to keep rolling for Delta, for the transports, or the general economy.
You’ll get a tell on this over the next few days. Rumors are flying that Berkshire Hathaway Inc. (NYSE:BRK.A) may make a bid on Delta , or perhaps Southwest Airlines Co (NYSE:LUV). If people don’t buy the rumor, it tells me they’re battening down the hatches, waiting for an economic storm.
That would be prudent. Watching what investors do, not listening to what they say, is a good rule of thumb in any market.
What Delta’s stock action says is to be defensive.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
