It’s Way Too Early to Take a Long Position in Delta Air Lines Stock

Airlines will recover at some point, but the timing isn't quite right yet to buy DAL stock

Of all the economic sectors impacted by the coronavirus from China, the air-travel industry was hit especially hard. As a result, Delta Air Lines (NYSE:DAL) stock was halved from more than $60 to around $30 within a matter of weeks.

DAL Stock: It's Way Too Early to Take a Long Position in Delta Air Lines
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It could be argued that the coronavirus crisis won’t last forever and people will travel again at some point in time. There’s is merit to that contention, but it’s difficult to time the recovery in airline travel. Besides, the data tends to suggest a slow, hard road ahead for DAL stockholders.

No Dividend? No Thanks

For dividend investors, DAL stock provided quarter after quarter of steady income. This would cushion the blow when the share price declined. And indeed it has declined recently, so dividend payouts should be the saving grace for shareholders.

Unfortunately, that’s not the case for the foreseeable future. As InvestorPlace contributor Patrick Sanders recently observed, Delta’s board has approved a dividend-payout suspension. And because of the way recent federally funded airline bailouts are structured, Delta may be restricted from offering dividend payouts for a while.

This presents a one-two punch squarely on the chin of any DAL stockholder. First, no dividend payouts means less of a cushion against stock-price declines. Moreover, the lack of dividend payouts could deter people and institutions from buying shares. This could potentially place further downward pressure on the share price.

Along with the dividend-payout suspension, Sanders cites multiple inauspicious facts and figures that ought to deter any prospective owner of DAL stock:

“Delta CEO Ed Bastian has already said Delta’s revenues will plunge about 80% — or roughly by $10 billion — in the second quarter. The company grounded more than 600 of its 1,340 aircraft as it cut capacity by 70% … Even after [large-scale job] cuts … Delta says it is burning through about $50 million a day.”

But What About the Bailout?

Given those scary stats, it’s hard to blame S&P Global Ratings for downgrading Delta’s credit rating to BB. That’s commonly known as a junk rating. It’s usually a fairly reliable signal that a stock isn’t worth owning.

On the other hand, the U.S. government just approved a massive bailout package that included America’s biggest airlines. In fact, the Coronavirus Aid, Relief, and Economic Security (CARES) Act includes approximately $60 billion in financial aid for these embattled airlines.

That’s a hefty bailout package, no doubt. However, there are some strings attached. After all, the public wants to see some accountability here. For instance, while receiving aid, the airlines cannot issue any dividends to their shareholders.

Also, these airlines aren’t allowed to buy back shares of their own stock. This restriction is to last for one year after the loan has been fully repaid. That’s problematic because stock-share buybacks keep stock prices higher. Much of the past decade’s bull market has been due, at least in part, to share buybacks.

Additionally, the airlines receiving federal aid won’t be permitted to lay off their workers until Sept. 30. Companies often use job cuts to save money. Layoffs aren’t a pleasant fact of life, but they’re helpful for companies facing financial problems.

These stipulations make it difficult to conclude that the bailout package will provide much more than temporary relief for these troubled airlines. Delta Air Lines chief executive officer Ed Bastian even admitted, “It’s important to remember that the relief package is not a cure for the unprecedented challenges we face.” Evidently, addressing these “challenges” could involve Delta grounding airplanes and/or cutting plane capacity.

The Takeaway on DAL Stock

Prospective investors might be encouraged because a relief package was approved. This, however, doesn’t mean that DAL stock will recover anytime soon. Without dividend payouts or encouraging financial stats, it’s best to leave Delta stock alone until the airline industry recovers.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarkets, Finom Group, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/03/way-too-early-long-position-in-delta-air-lines-dal-stock/.

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