We're about to swing into earnings season, and as in any earnings season, we'll see dividend raises from a clutch of familiar (and not so familiar) companies.
Indeed, the hikes have already started. Delta Air Lines (NYSE: DAL) , which just unveiled its latest set of quarterly results, recently announced a monster dividend raise, while a more modest one was declared by heavy machinery stalwart Caterpillar (NYSE: CAT) .
1. Delta Air Lines
Signaling great confidence in its future -- and bolstered by the $2.7 billion in free cash flow (FCF) it generated in the first half of the year -- Delta declared a 50% increase in its quarterly payout this past June to $0.15 per share.
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Delta's just-released second-quarter results disappointed more than a few investors, but they weren't half bad. Non- GAAP (adjusted) revenue was up 5% year over year to more than $15 billion, and while adjusted net income did slide by 11%, the carrier was still very much in the black with a more than $1.5 billion profit. And there's that FCF, which soared 16% to almost $1.3 billion.
Delta smartly concentrates on the higher end of the market, but no passenger carrier can entirely escape collateral damage from the aggressive price cutting we've seen on fares, mainly in the basic ticket categories. The company is guiding for adjusted net income of $1.70 per share to $2 per share for the third quarter, well below the $2.68 per share it earned in the same period last year.
Still, Delta is one of the better-managed and well-positioned airlines. On a long-term basis, it should continue booking profits and throwing off cash. It suspended its payout in the early days of the coronavirus pandemic, but reinstated it in mid-2023. The current level is still well under that of the pre-COVID times, so I foresee continued aggressive hikes from management in an effort to get at least close to the previous amounts.
Delta's higher dividend will kick in with its next payout, slated to occur on Aug. 20 for shareholders of record as of July 30. At the most recent closing share price, it yields 1.3%.
2. Caterpillar
Another recent distribution lifter is construction equipment specialist Caterpillar. Its 8% boost brings its quarterly payout to $1.41. Accompanying the dividend hike was a $20 billion addition to its existing share-repurchase program, which now has a total of $21.8 billion under authorization; the initiative has no stated end date.
No one should be surprised by Caterpillar's dividend raise: An annual bump is a habit for the typically profitable industrial giant. In fact, this marks the 30th year in a row the company has added at least a few coins to its payout.
And why shouldn't it? Caterpillar is a powerful player in its niche, a go-to supplier of heavy machinery and vehicles for a wide range of industries. While conditions in its business depend to an extent on the health of the economy, the company's sprawling product lineup acts as something of a hedge against economic lurches.
Since it's in such a strong position, Caterpillar has some scope to boost prices when it feels such moves are necessary. In the first quarter, its sharp 29% year-over-year increase in operating profit was due in no small part to what management described as "favorable price realization." This helped lift net income notably; on an adjusted, per-share basis, it was 14% higher on revenue that was basically flat year over year.
That increase in profitability was outshone by an even more impressive improvement in FCF, which leaped by 60% to over $1.3 billion. That was far more than enough to cover the $648 million in dividends the company paid out. Even if Caterpillar can't maintain that kind of growth in the coming years, the FCF tap should keep flowing heavily enough to support a steadily increasing dividend, not to mention the occasional share repurchase.
Caterpillar will pay its next dividend on Aug. 20 to investors of record as of July 22. The new payout yields 1.7% at the company's current share price.
Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy .
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