Author Archives: Kuangji He

A brief introduction

Delta Airlines initiated a shareholder cash return plan in its capital deployment strategy announced Wednesday, May 8. The carrier will be paying out a quarterly dividend of 6 cents a share beginning Sept. 10 for shareholders on record as of Aug. 9.

At the end of the first quarter, Delta had 855 million shares outstanding, and will be paying out dividends worth approximately $50 million every quarter or $200 million every year at the current payout rate. In addition, the carrier announced a share buyback program worth $500 million that ends in June 2016. Together, through these two channels, Delta plans to return over $1 billion to its shareholders over the next three years.

Accounting Effects

According to this estimation, there are several journal entries need to be recorded for dividends payments and stock repurchase.

Dr. Cash Dividend (-RE)               $200,000,000

Cr. Dividend Payable (+L)                $200,000,000

Dr. Dividend Payable (-L)             $200,000,000

Cr. Cash  (-A)                                    $200,000,000

(Dividend assumed to be paid next year)

Assume that Delta will buyback its stocks evenly next three years, so it needs to pay $500,000,000/3=$16,666,666.67 for stock repurchasing.

Dr.   Treasury Stock (-CC)            $16,666,666.67

Cr. Cash (-A)                                     $16,666,666.67

Reasons for Delta Capital-Return Plan

It is most probably that Delta wants to send out a positive message to investors. These developments send out a positive message to the investor community that Delta has sufficiently de-leveraged and therefore de-risked its balance sheet and that it sees stable earnings in the foreseeable future.

Dividends payment would less the Retained Earnings and stock repurchase would decrease the number of shares outstanding, thus it might boost the price by increase the market demand for its stock and can also increase the EPS, which can offset the diluted effect due to the dividend payment.

Public Concerns

However, Delta’s stock price plummet from $18.57 to $ 17.70 (4.68% decrease) on May 9th and just rebounded a little higher at $18.64 on May 16th, which reflects that the public suspend on the effect of its plan. 

It can affect its liquidity because a big chunk of free cash flow would be used for dividends payment and buybacks;

The cash paid plan would make Delta vulnerable to the market changes such as fuel prices increase and lower prices from competitors.

It has witnessed a volatile past and Delta’s stock price just recovered. Put forward such strategy can bring more uncertainty and risks for its future.

Given all these analyses, can Delta afford its plan to return capital? The airline will have to maintain stable operating cash flows to be able to make pension contributions and give cash back to shareholders.

Source:

http://blogs.wsj.com/cfo/2013/05/08/delta-capital-return-plan-puts-focus-on-cash-flow/