As Warren Buffett Sells DAL Stock, It May Be Time to Bail Yourself

In recent days, investors seem to have a more optimistic outlook on the potential health and economic impact of the COVID-19 outbreak. As a result, many shares have gone up double digits. However, Atlanta-based Delta Air Lines (NYSE:DAL) has not fully participated in this move up. Year-to-date, DAL stock is down about 58%, which means the shares are now in a bear market.

As Warren Buffett Sells DAL Stock, It May Be Time to Bail Yourself
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Although the airline has not confirmed its next quarterly earnings release date, it is expected to report Q1 earnings by mid-April. In recent days, legendary investor Warren Buffett has slashed his exposure to the industry.

I believe that the change in his stance is important and that it may still be too soon to buy into airline shares including DAL. Let’s take a closer look.

Airlines Are in Survival Mode

A large number of countries have now banned almost all international travel. Domestic travel in the U.S. remains quite restricted too. And most consumers are not likely to travel much any time soon unless it is an emergency. Thus U.S. airlines have been suspending a majority of flights for the foreseeable future.

As early as mid-March, Delta Air Lines CEO Ed Bastian confirmed that the airline had negative net bookings. In other words, it had more cancellations than new reservations. He also announced that he’d not be taking any salary for the next six months.

So far Delta has cut about 70% of capacity and grounded 600 planes. Similarly, American Airlines (NASDAQ:AAL) has cut 50% of its capacity —  40% domestically and 75% internationally. The Department of Transportation (DOT) has notified airlines that they must issue customer refunds for canceled flights.

Other steps the company has taken to mitigate the financial aspect of the outbreak include a company-wide hiring freeze, deferring $500 million in capital expenditures and delaying $500 million of voluntary pension funding.

In summary, airlines have been struggling financially for weeks. Delta’s YoY revenue was down $2 billion in March. Unless the global pandemic is under control soon, it is not possible to know when any airline will be able to go back to full capacity and improve its revenue levels again.

Buybacks and Dividends Set to Disappear

On March 27, President Trump signed a $2.2 trillion economic rescue package into law. It includes more than $50 billion for commercial airlines, including $25 billion in direct grants.

The news was the lifeline airline executives had been hoping for. On April 3, American Airlines, JetBlue (NASDAQ:JBLU), United Airlines (NYSE:UAL) as well as Delta officially submitted applications to be granted a deal.

Yet the stimulus package comes with several strings attached. It would “prohibit stock buybacks and share dividends for at least a year after the loans have been repaid. It also restricts executive compensation.”

According to a recent Barron’s article, “from 2009 to 2018, 465 companies in the S&P 500 index spent $4.3 trillion on stock buybacks, equal to 52% of their combined profits … In the airline industry alone, American, Delta, United, and Southwest, as well as Fedex and UPS, spent heavily, with $77 billion in buybacks (56% of profits) and $35 billion in dividends (25% of profits).”

Delta has already suspended share buybacks and dividends. The aim is to stop the daily cash burn of about $50 million.

Now that airlines will not be able to buy back their shares or offer dividends, it is quite difficult to make a long-term bullish case for most airline stocks.

At this point, the government is hopeful that these payments will help stabilize the nation’s air transportation system. However, holders of DAL stock should keep an eye on potential industry developments in the coming weeks and months. This is a dynamic situation that may change rapidly.

DAL Stock’s Recent Price Action

Stock market carnage has hit industries across the board. And one of the worst affected is the global aviation industry.

DAL stock’s 52-week price range has been $63.44 (July 24, 2019) and $19.10 (March 18, 2020). As I write, the price is hovering around $24.5.

So far in April, the shares are down over 20%. Part of this most recent decline can be attributed to the recent transactions by Warren Buffett. When he buys or sells shares, the investment community pays attention. After all, it might also give a strong indication of his views on an industry or the global economy. According to a regulatory filing of Apr. 3, his firm Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B) cut its stake in Delta by about 20%.

Initially, the price reaction looked as if markets would be ignoring Buffett’s recent move. However, the full effect of this sale may not be as clear cut yet.

If you are an investor who also pays attention to technical charts, short-term price action would urge caution. The DAL share price is likely to be volatile with a downward bias.

From a technical chart perspective, it is likely that DAL stock price may once again test the recent low of around $20. Therefore if you are not yet a shareholder, you may first want to analyze the quarterly results at the time.

But if you already own shares, you may want to ride out any further volatility. Alternatively, you may consider initiating a covered call position. For example, a May 15-expiry ATM covered call would give you some downside protection in the coming weeks. It’d also enable you to participate in a potential up move.

The Bottom Line on DAL Stock

Airline operations worldwide have been crippled by the spread of the coronavirus. As a result, airline stocks including DAL have gone into a tailspin.

In recent days, broader market action seems to be tied to the number of new COVID-19 cases and deaths recorded on a given day. Analysts are debating how long it’ll take our economy to go back to its pre-coronavirus days. And retail investors are questioning whether airline stocks are good investments.

I am of the opinion that the U.S. economy is resilient and the markets are offering the average investor many robust shares at a discount. However, 2020 may be a lost year for airline earnings. Therefore, I’d not rush to buy DAL stock just yet.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.

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