Airline stocks and the U.S. Global Jets ETF (NYSEArca: JETS), the only dedicated airline industry-related ETF on the market, have recently been stout performers, a pleasant surprise when considering oil was one of 2016’s best-performing commodities.
JETS follows the U.S. Global Jets Index, which uses fundamental screens to select airline companies, with an emphasis on domestic carriers, along with global aircraft manufacturers and airport companies. After decades of being known as a low-yielding sector, airlines are starting to become more generous with shareholder rewards and that could be another catalyst for JETS this year.
Most of the handful of airlines that do pay dividends have been steadily increasing them in recent years, a reflection of the industry’s improving health after years of bankruptcy filings, ballooning debt, and unsound pricing discipline. For one thing, the industry’s balance sheet is much improved, leaving more cash flow available to pay dividends and repurchase shares,” reports Lawrence Strauss for Barron’s.
Airlines’ impressive ability to generate cash is one reason Warren Buffett shook off his long-standing aversion to the sector and recently unveiled stakes in several of the top holdings in JETS.
Now, with Warren Buffett’s investment of over $1.2 billion into American Airlines, United Continental Holdings, Delta Air Lines and Southwest Airlines, airline stocks are taking flight. The move was a shocking reversal for Buffet, whom has shunned the industry for decades following a volatile investment in U.S. Airways in 1989.
JETS follows a type of smart-beta index that screens for multiple fundamental factors, including cash return on invested capital (CROIC) with additional inputs based on sales per share growth, gross margins, and sales yield. The ETF includes a hefty tilt toward airlines, but it also holds aircraft manufacturers and airports & terminal services.
Delta “has steadily raised its quarterly payout, most recently in 2016, to 20.25 cents a share, a 50% increase from its previous level. And from the perspective of returning capital to shareholders, Delta has earned good marks,” according to Barron’s.
The ability of JETS and its holdings to rise in the face of rising oil prices, usually a major headwind, is undoubtedly impressive. It is also encouraging because some market observers believe oil prices can continue climbing.
Other catalysts include, renewed airline pricing power evidenced by higher ticket prices, and more fees paid per traveler, increased airline profitability, new aircraft program launches and continued demand for aircraft models and technology.
For more information on airline ETFs, visit our Airline category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.