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TheStreet Open House

3 Reasons Spirit Airlines Needs to Start Paying a Dividend

NEW YORK (TheStreet) -- As with other major airlines such as Delta (DAL), Southwest (LUV) and United-Continental (UAL), the stock price of Spirit Airlines (SAVE - Get Report) has soared. The reasons for this were detailed in an article on TheStreet mid-November, when Spirit Airlines was under $45. The price has since taken off to more than $65 a share. Now there are three reasons Spirit Airlines needs to start paying a dividend:

Spirit needs to become an income stock in addition to being a growth stock.

On a quarterly basis, earnings per share are up more than 50% for Spirit Airlines. Over the next five years, EPS are projected to rise by 28%. As the chart below shows, that growth combines with no debt and a double-digit profit margin, but no dividend for those owning the stock. Although there has been no public discussion of initiating one, it is time for Spirit Airlines to start paying a dividend to share its current and expected wealth with its shareholders.

Courtesy of Finviz

Read More: 10 Best Airline Stocks for 2014

Spirit Airlines can easily afford a modest dividend to start.

As the chart above shows, Spirit Airlines has no debt and a double-digit profit margin. Having no debt is very appealing for an airline, due to the high capital costs and fixed expenses, most notably for fuel. The returns on investment, assets and equity of Spirit are all more than twice the industry average, so there is easily enough cash to finance a dividend and still meet higher operating expenses as its equipment ages, especially since it has no debt.   

If Spirit Airlines were to start off with just a 1% dividend, about half the average for stocks in the Standard & Poor's 500 Index (SPY), that would be much higher than those offered by Delta, Southwest and United Continental. It would also top the industry average of 0.80%.

Paying a dividend will make Spirit Airlines more attractive as an investment.

With a dividend, Spirit Airlines would then be suitable for mutual funds that can only buy stocks that pay one. Many other investors, both individual and institutional, prefer equities that pay income. Shareholders like these are long term in nature, which provides a highly desirable solid foundation of ownership for a publicly traded company.

For those and other reasons, Spirit Airlines should announce that it intends to be the only airline to become a "Dividend Aristocrat."

A Dividend Aristocrat is a publicly traded company that has increased its dividend annually for at least the past 25 years. That would set off Spirit Airlines from other airline stocks in a very positive manner to the investment community. Knowing that a dividend increase was coming yearly, investors would be less likely to sell, committed to Spirit Airlines for the long term. As a Dividend Aristocrat, it would join a select group of stocks led by such blue chips as AT&T (T), Coca-Cola (KO) and ExxonMobil (XOM) among other blue chips.  Most important of all for investors, it would increase the long-term total return of Spirit Airlines.

Read More: Buy Boeing Shares Following Big Buy Order From Emirates Airline


At the time of publication, the author held no positions in stocks mentioned, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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