As we approach the New Year, four major companies that faced significant dividend reductions in 2020—Boeing, American Airlines Group, Royal Caribbean Group, and Carnival—are preparing to reinstate their payouts to shareholders.
In the wake of the Covid-19 pandemic, companies across various industries endured substantial financial setbacks. Travel-related companies, in particular, were severely impacted, being forced to take on debt to stay afloat during the sudden halt in their operations. To preserve cash, most of these companies suspended their dividend payments. However, as economies recover and tourism resumes, many have started to restore their quarterly payouts.
Fortunately, the aforementioned four companies are in a strong position to resume dividend payments. This move can potentially act as a catalyst for their stocks in the year 2024.
Undoubtedly, these companies faced an arduous period. Between 2020 and 2022, they collectively spent approximately $68 billion to ensure their survival—more than double the $32 billion they generated in the preceding three years. Thankfully, they have managed to regain their financial footing. According to FactSet, their combined free cash flow is estimated to amount to $9 billion in 2023. Moreover, this positive trend is expected to continue, with free cash flow projected to reach around $11 billion in 2024 and $17 billion in 2025.
If these companies were to distribute half of their anticipated 2024 free cash flow as dividends, investors could enjoy a yield of nearly 3%. However, it is possible that they may choose to be more conservative and allocate only 40% of their available cash for dividends. This would result in a yield of 2.1%, equivalent to the average yield of dividend-paying stocks in the S&P 500 index. Alternatively, by paying out 30% of their cash, investors would receive a yield of approximately 1.6%, matching the overall yield of the S&P 500.
In conclusion, the return of dividend payouts for these four companies marks an important milestone as they emerge from the challenges posed by the Covid-19 pandemic. The resumption of dividends presents an opportunity for investors to benefit from capital returns in the coming years.
Dividend Restarters and the Importance of Debt Paydown
Restarting dividend payments may not be a cure-all solution for struggling stocks. The shares of companies like Las Vegas Sands and Southwest Airlines, which have recently resumed quarterly payouts, have seen a decline in value. However, it’s important to note that these declines may be attributed to larger economic challenges, such as China’s struggling economy and systemwide issues, rather than the dividend payouts themselves.
There are other factors that contribute to companies’ reluctance to restart dividends. Debt is a significant concern. As of now, FactSet data indicates that companies like Boeing, American, Royal Caribbean, and Carnival, including their net debt and stock, have a combined value of $318 billion. Surprisingly, this value is not far off from the $327 billion value at the end of 2019, before the pandemic struck. Essentially, the market is suggesting that despite all the disruptions of the past years, these businesses have essentially reached a flat point. However, it’s worth noting that the value today consists of around $200 billion in equity value and approximately $118 billion in net debt. In comparison, the 2019 value consisted of about $261 billion in equity value and $66 billion in net debt. It makes sense for these companies to prioritize debt repayment.
Even if debt paydown takes precedence over dividend payments, it can still benefit their stocks. Let’s consider a scenario where all of the projected 2024 free cash flow is used to pay down debt, while maintaining the aggregate value of the four aforementioned companies. In this case, the equity value would increase to about $221 billion, and outstanding debt would decrease to approximately $107 billion. This would result in a 10% equity return.
It’s important to acknowledge that most companies in the S&P 500 should prioritize paying dividends. This includes companies like Boeing, Royal Caribbean, Carnival, and American Airlines. It’s only a matter of time before they do so, and the present is as good a time as any.