Conventional wisdom holds that airlines are not a value investment. Yet Berkshire Hathaway (NYSE: BRK.B) held a 9.8% stake in American Airlines (NYSE: AA) in Summer 2019, CNBC estimates.
Warren Buffett’s interest in American got me wondering about the world’s second largest air carrier; Delta Airlines (NYSE: DAL). Delta shares were trading at $53.92 on 8 October 2019, so they are cheap.
Interestingly, the Points Guy thinks Delta could surpass American in 2019 and become the world’s largest airline. Thus, Delta is a growing business with a low-priced stock.
Airlines are a Growing Business
Air travel is a growing business particularly in the United States. For example, the U.S. Bureau of Transportation Statistics estimates the volume of airline passengers grew by 4.8% in 2018, and 8.5% in 2017 and 2018.
In fact, the number of airline passengers in America reached an all-time high of one billion in 2018, the Bureau claims. Moreover, U.S. passenger traffic rose from a record high of 965.4 million in 2017. Plus, U.S. airlines carried 4.9% more passengers on domestic flights and 3.1% more passengers on international flights in 2018, the Bureau estimates.
Thus, Delta is a growing company in a growing business. In addition, Delta’s business is safe for the foreseeable because there is no real alternative to air travel in the USA.
America’s Airlines Have No Real Competition
America’s national passenger railroad Amtrak is a bad joke outside the Northeast Corridor.
For example, it takes an Amtrak train 16 hours and 50 minutes to travel between Denver and Salt Lake City. Moreover, there is at least a train between Denver and Salt Lake City. There is no passenger rail service between many American cities, including Las Vegas and Los Angeles.
However, it takes seven hours and 58 minutes to drive the 519.4 miles between Denver and Salt Lake City. Meanwhile, it takes around an hour and 35 minutes to fly between Denver and Salt Lake City. Given that time difference, I think the airlines’ American travel monopoly is safe until somebody builds a working Hyperloop.
America’s highway system is over-congested and falling apart which discourages car travel. Notably, traffic jams are now a common sight on remote rural highways in the United States.
Finally, America has been incapable of building high-speed rail lines; airlines’ most dangerous competitor. For instance, the state of California spent $20.5 billion on high-speed rail and only got a short-line between two smaller cities; Bakersfield and Merced. Consequently, Governor Gavin Newsom (D-San Francisco) and state legislators want to redirect the high-speed rail funds to commuter rail in Los Angeles, The Los Angeles Times speculates.
Delta and the Airline Toll Booth
Therefore, airlines are the only realistic option most Americans have for long-distance travel. Only a tiny minority can afford private jets; and few people can spend several days driving or riding on a train, for a vacation or a business trip.
Thus, airlines have a sort of toll booth on long-distance travel in North America. Hence, U.S. airlines fit into Warren Buffett’s toll booth investment strategy. To elaborate, Buffett likes to buy companies with large economic moats, VintageInvesting notes at Value Walk.
Having a moat means a business can set up a toll booth and charge toll to anybody who wants to cross the moat. Similarly, any American who lives outside the Northeast Corridor and wants to travel to another city in less than 10 hours need to pay the airlines’ toll. Moreover, any American who lives in the Northeast Corridor will need to fly to reach any other part of the country in a reasonable time.
Is Delta Making Money?
Okay, so Delta Air Lines (NYSE: DAL) is a growing company with a large moat but is it making money?
Currently, the answer is yes, Delta reported a quarterly gross profit of $7.745 billion on quarterly revenues of $12.536 billion on 30 June 2019. In addition, Delta reported a quarterly operating income of $2.128 billion and a quarterly income of $1.443 billion on the same day.
Moreover, Delta generates cash. Delta Airlines reported an operating cash flow of $3.272 billion and a free cash flow of $1.712 billion on 30 June 2019. Plus Stockrow reports Delta had $2.009 billion in cash and equivalents on 30 June 2019.
Hence Delta makes money but the company’s ability to accumulate cash is limited. In particular, the low margin of safety scares me. To explain, I equate the cash with the margin of safety. In my opinion, the more the cash a company has, the safer it could be.
Is Delta a Good Dividend Stock?
However, I think Delta is a decent dividend stock; because it paid a 40.25₵ quarterly dividend on 24 July 2019. In addition, that dividend grew by 5.25₵ in 2019 rising from 35₵ on 1 May 2019.
Dividend.com estimates Delta (NYSE: DAL) shares offered a dividend yield of 2.99%, an annualized payout of $1.61, and a payout ratio of 28.8% on 8 October 2019. Plus, Delta has experienced five years of dividend growth.
I think Delta is a decent income stock but a poor growth investment. To explain, I think the cost of expanding airline operations will eat up most of Delta’s profits. Plus, Delta is very vulnerable to outside threats including rising oil prices, new technologies, and economic downturns.
In the final analysis, I believe there are cheaper stocks with better dividends and growth potential that are safer. Hence, I believe staying away from airline stocks is still a smart move for the average investor.