The COVID-19 outbreak has shut down large swaths of the economy, and a growing number of blue chip companies have suspended their dividends.
Boeing Co. (BA) and Delta Air Lines Inc. (DAL) have become the latest casualties of the crisis, suspending their dividends to shore up capital as the airline industry struggles with an unprecedented drop in demand.
Let us look into the implications of dividend suspensions and what it could mean for investors.
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Boeing Struggles on Two Fronts
Boeing, the largest U.S. aerospace supplier, has been struggling since the grounding of the 737 MAX in March 2019. The problems with the flagship jetliner have already cost nearly 350 lives and at least $18.7 billion in expenses — not including the damage to the company’s once-stellar reputation.
The COVID-19 crisis is expected to cause a shock worse than the 9/11 terrorist attacks or the Great Recession in 2008 and 2009. In addition to at least 13 airlines across the world going out of business since the begining of 2019, the significant drop in air travel due to COVID-19 could cause many customers to delay or cancel their orders — compounding Boeing’s problems.
On March 20, Being released a corporate statement saying “Boeing is drawing on all of its resources to sustain operations, support its workforce and customers, and maintain supply chain continuity through the COVID-19 crisis and for the long-term.”
The company is seeking at least $60 billion in government aid to support the company and its supply chain, including public and private liquidity and loan guarantees.
Prior to the dividend and buyback suspension, the company had increased its dividend for eight consecutive years and spent $45 billion on stock buybacks since 2009. The dividend yield leading up to the suspension amounted to 4.55%, or $8.22 per share in annualized payout.
Delta Air Lines Slims Down
Delta Air Lines had been a solid performer moving into 2020 with growing revenue and net income, but the COVID-19 crisis has brought the airline industry to a virtual halt.
The company suspended its dividend payments and share buybacks once the extent of the COVID-19 crisis became clear and, more recently, the board voted to suspend future dividend payments in an effort to shore up capital.
Management projects that revenue will fall $10 billion in the upcoming June quarter compared to the same period in the previous year, representing a nearly 80% dip.
“Our revenue outlook continues to deteriorate in the short term with the decline in travel demand,” said CEO Ed Bastian in a memo. “It’s also clear, given the underlying damage the virus has created to the overall economy, that demand recovery will take an extended period once the virus is contained.”
The company entered into a $2.6 billion secured credit facility and is drawing down $3 billion under existing revolving credit facilities to bolster its cash position over the coming weeks and months. In addition, the company is also working with the government on disaster relief assistance.
Prior to the dividend and buyback suspension, the company had increased its dividend for six consecutive years and bought back about $2.5 billion in stock in 2019. The company had a dividend yield of 5.08% and an annualized payout of $1.61 per share, representing a 52% payout ratio leading up to the suspension.
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Government Aid on the Way
The $2 trillion COVID-19 relief package includes a total of $88 billion in taxpayer assistance for the airline industry, according to an NPR analysis.
Direct cash grants totaling $25 billion will be given to commercial airlines, $4 billion to cargo air carriers, and $3 billion for contractors. Among other rules, grant recipients must use the cash exclusively to pay employees and must agree to forgo dividends and buybacks through September 2021. These steps are critical to national security. The government may require an equity stake in return.
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What the Future Holds
The true impact of the COVID-19 crisis on the airline industry is highly variable and uncertain at the moment.
The International Air Transport Association said the industry’s revenue could fall by $63 billion to $113 billion this year, which is much more severe than a $29 billion impact the trade group estimated just a few weeks ago. With narrow profit margins and high debt loads, airlines could also have trouble raising capital to survive the crisis.
The good news is that airlines came into the crisis in a strong position. Meanwhile, OPEC’s price war with Russia has caused fuel prices to sharply decrease, which have helped improve margins. Airlines that hadn’t held significant fuel hedges could have an opportunity to capitalize on lower cost, although there’s no guarantee about how long it will last.
The Bottom Line
The COVID-19 crisis has caused many blue chip companies to suspend their dividend payments and share buyback programs. While the final impact remains uncertain, the combination of government aid and low fuel costs could help most large companies survive — although resumed dividend payments don’t appear likely until September 2021 at the earliest.
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