Chorus Aviation Inc (CHR.B), AIR NEW ZEALAND ORD (ANZFF): 2 Big Yields Among Airlines
The airline industry is not normally one associated with big dividends but two carriers are paying dividends that rival the best of income stocks. Here I discuss these two airlines and how they differ from traditional low-yield airlines.
A Chorus Aviation Inc (TSE:CHR.B) of dividends
Chorus Aviation Inc (TSE:CHR.B) has been a volatile stock over the past several months as investors looked toward an arbitration ruling in Chorus’ ongoing dispute with Air Canada (TSE:AC.B). Shares of Chorus were hit hard earlier this year when the airline cut its dividend in half as uncertainty around the ruling lingered.
In contrast to the drop earlier in the year, the past few weeks have been highly positive for Chorus Aviation Inc (TSE:CHR.B) shareholders. Chorus won its dispute with Air Canada (TSE:AC.B) and, in response, hiked its dividend by 50%. Although the dividend it still below where it was at the beginning of the year, shares of Chorus have regained some ground as a large amount of uncertainty has been lifted and future cash flows are projected to be stronger.
The dividend yield on Chorus Aviation Inc (TSE:CHR.B) shares now sits above 10% and the airline’s CEO, Joseph Randell, said in a statement that even at this dividend level Chorus can manage debts and make capital investments. In contrast, SkyWest, Inc. (NASDAQ:SKYW) pays a dividend of just above 1% and Republic Airways Holdings Inc. (NASDAQ:RJET) does not pay a dividend. Both of these carriers operate regional flights for major airlines as well but retain a higher percentage of earnings than Chorus.
While Chorus Aviation Inc (TSE:CHR.B)’ dividend is certainly unique in an industry where 1%-2% dividends are considered high, the carrier does face risks from Air Canada (TSE:AC.B) choosing other regional operators. And with Air Canada being the source of over 99% of Chorus Aviation’s revenue, Chorus would find itself in a rough place if Air Canada shifted a significant amount of its business away. An agreement between Air Canada and Chorus will keep Chorus flying many Air Canada flights until 2020. With the time in between, Chorus can work on cutting costs to make itself more competitive with rivals as well as attempting to diversify its revenue stream away from Air Canada.
After getting into serious trouble several years ago, AIR NEW ZEALAND ORD (OTCMKTS:ANZFF) is posting solid profits again as the majority government-owned airline moves along its path to recovery. In November, the government sold 20% of the airline lowering its stake from 73% to 53%.
Recently, AIR NEW ZEALAND ORD (OTCMKTS:ANZFF) has been paying a significant, albeit, inconsistent dividend. Payments for 2013 were NZ$0.08 per share (US$0.07). With shares trading at NZ$1.63 (US$1.34), the trailing dividend yield is nearly 5%.
AIR NEW ZEALAND ORD (OTCMKTS:ANZFF) paid a higher dividend for 2013 than in the recent past largely due to the economy’s and the airline’s recoveries. But it is also important to note that despite the increased payment, Air New Zealand’s payout ratio has dropped from 85% to 49%. Over the next several years, the airline plans to upgrade its fleet and this reduction in the payout ratio continues to reward shareholders while satisfying the airline’s capital needs.
Although forecasting this airline’s dividend is difficult, it would be reasonable to see a slight bump in the payout if results continue to improve. Additionally, the continuing recovery at AIR NEW ZEALAND ORD (OTCMKTS:ANZFF) should boost shares if results live up to expectations.
Shares of AIR NEW ZEALAND ORD (OTCMKTS:ANZFF) are traded over the counter in the U.S. but have a low volume and typically a large spread. While long-term holders could counter this issue with enough patience or an investment time frame that would balance out the higher ask price, those looking for the more liquid version should see if they can buy the New Zealand listed shares. This is available at Fidelity and is likely available at other brokerage firms as well although some firms charge a higher commission than standard trades.
Airlines are capital intensive businesses often accompanied by high debt levels. But Chorus and Air New Zealand offer some of the highest dividend yields in the industry. Investors not impressed by the 1% yields in the U.S. market may want to look internationally at these two carriers. Although not without risks, these two carriers can serve to diversify an airline investor’s portfolio internationally while adding more income than seen at most other airlines.
How to hedge an airline investment
Airlines are major consumers of energy — fuel costs are one of the largest parts of the major airlines’ expenses. But with oil prices remaining volatile, it’s a great time for airline investors to hedge jet fuel costs by choosing the right energy companies.
The article 2 Big Yields Among Airlines originally appeared on Fool.com.
Alexander MacLennan owns shares of Air Canada. The Motley Fool has no position in any of the stocks mentioned.
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Tags: Air Canada (TSE:AC.B), AIR NEW ZEALAND ORD (OTCMKTS:ANZFF), Chorus Aviation Inc (TSE:CHR.B), Republic Airways Holdings Inc. (NASDAQ:RJET), SkyWest Inc. (NASDAQ