Airline Stock Ready to be Great Dividend Payer? AAL

Currently, American Airlines (AAL) cannot be called a great dividend stock.  They are only paying a less than 1% dividend yield.  However, they are making a lot of money.  With the large amount of cash they are generating, they can become a fantastic yielder.  In fact, even if they raise their dividend to 5% tomorrow, they will still have way more than enough earnings to cover the dividend payment.

The Sky

Valuation

Recently, Warren Buffet’s Berkshire Hathaway’s made a purchase into the airline stocks, including American Airlines (AAL).  Being that he is viewed as a value investor, we believe this provides some stability to the stock and gives it validation.  The stock is trading at a PE of about 5, which is super cheap.  Either the stock market predicts bad things in the future or it is way underpriced.  With earnings at over $9 per share, a 50% earnings haircut would still give American Airlines (AAL) a PE of less than 10.  With Berkshire Hathaway’s purchase, we are going to assume some safety with this stock and that dividends will increase.

Dividend

They have been paying a dividend since July 2014, making 10 dividend payments of $0.10 per share.  That is not the longest track record, but they have had no dividend increases or cut.  The dividend to earnings is less than 5%.  They could triple their dividend payment and still have lots of earnings to more that by cover that by 7 times over.  However, with the cheap share price.


Background

American Airline (AAL) flies aircraft throughout the US and around the world.  They have around 1,802 airplanes.  There airplanes fly to 350 destination in 50 countries.  Their headquarters is in Fort Worth, Texas and were founded in 1934.

PlaneSpotters.net/airline/American-Airlines

What I bought

On 1/5/17, we bought 100 shares for $4,667.45 including those sky-high commissions.  This will add $40 per year in dividends.

In addition, we sold 1 call, Jan 2017 at $47 strike price.  We took in $111.95 in cash.  This reduced our cost from $46.67 to $45.56.  We see 3 scenarios that can happen:

  • 1: The stock goes up in price and we get called away. If this happens, we will make $144.50 in less than 1 month. Making a 3.1% profit in less than 1 month is not bad.
  • 2: The stock stays flat. Then the call options expire worthless and we get to keep the shares and the money from the call premium.
  • 3: The stock falls in price. The call expires worthless, and it reduces the amount of the paper loss by $111.95.  So, it offers a little bit of protection.

Now this is the first option contract I have done with my passive income dividend stocks.  While selling this call option could be viewed as going against one of our rules, “not wanting to sell stocks”, we think we will be ok.   It will be great for a first experiment, and we need to learn sometime.  Plus, if we do get called away, we can use the profits to buy some of the shares back.  However, they will be at higher price. We will see what happens and update you with what we decide to do.  With the potential of being a great yielder and the high premium for call options, we think American Airlines (AAL) will be a nice addition to our dividend income.

View more stock purchase post to continue with our journey.

What do You Think About American Airlines (AAL)

What do you think about an airliner being used for passive income and selling call options to generate some cash?  Please feel free to share in the comment section below.

Disclosure: AAL – We own shares and sold a call options

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5 thoughts on “Airline Stock Ready to be Great Dividend Payer? AAL

  1. Thanks for sharing your recent pick up. You don’t really see many long term dividend investors buying airlines for their portfolios but I have seen some DAL buys in the past. Again, it’s rare. It’s amazing how fast the whole industry turned around in the last ten years or so. They have really limited capacity and are squeezing more and more $’s form every passenger. Thanks for sharing.

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