Delta Air Lines (NYSE:DAL) stock is the kind of stock that contrarian value investors like. DAL trades at a cheap valuation, but the underlying company fundamentals are very strong.
For example, DAL stock trades at a forward price-to-earnings metric of 8.2 times earnings. It also has a 2.8% dividend yield. In other words, investors are getting paid to wait until Delta Air Lines stock rises to a higher valuation.
In fact, over the past five years, dividends have grown at a rate of 38% annually, according to Seeking Alpha. And over the past three years, payouts grew an average of 30% annually. In the past year, Delta hiked its dividends per share 15%.
Strong Underlying Fundamentals
In addition, if you look at the company’s free cash flow over the trailing 12 months, it consistently makes between $3 billion and $3.5 billion in FCF per quarter.
Since Delta Air Lines stock has a market value of $39 billion, this means its FCF yield ranges from 8.1% to 9.5%. That is extremely high and indicates that Delta Air Lines is an attractive buy.
Moreover, some have pointed out that Delta’s earnings are expected to grow over 7% year-over-year. In addition, FCF is expected to hit $4 billion next year, according to at least one analyst.
Analysts covered by Seeking Alpha put its 2019 earnings per share estimates at $7.01 per share and $7.22 for 2020. That puts DAL stock on a very cheap 7x P/E ratio for 2019 and 7.2x for 2020.
Analysts Like Delta Air Lines Stock
Recently, a number of analysts have pointed out that Delta has a number of revenue drivers. For example, one analyst at Seeking Alpha wrote this very interesting article about three upside catalysts DAL stock has.
The article points out that DAL stock will benefit from:
- Its long-term profitable arrangement with American Express (NYSE:AXP).
- Delta’s fleet optimization will heavily cut its costs over the next five years (it has no 737 Max jets).
- Its expansion into Latin America through a pending joint venture with a Chilean airline company Latam (NYSE:LTM) will drive more revenue.
Delta recently held an Investors Day, on Dec. 12, 2019, where it highlighted its “global scale, powerful brand and unmatched competitive advantages.”
So, as a result, a number of analysts wrote up the stock on a positive note.
Bottom Line on DAL Stock
Guess which value investor really likes Delta Air Lines? Warren Buffett. Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) increased its stake earlier in April 2019 to nearly 11% of the company.
Buffett started buying DAL in 2016’s third quarter, along with a number of other airline stocks. So far, Berkshire Hathaway has made over 30% on his stake in DAL, according to The Motley Fool. I suspect that Buffett is going to continue to hold the stock. It seems to meet all his criteria.
In addition, he probably loves DAL stock’s dividend payments. Maybe you should invest in the stock as well, as long as Buffett likes it.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. Mark Hake runs the Total Yield Value Guide which you can review here. The Guide focuses on high total yield value stocks. Subscribers receive a two-week free trial.
