Canadian airlines have done tremendously well in recent years, outpacing growth in the TSX by a large margin. As passenger traffic has continued to grow, oil costs have come down, driving profitability to new all time highs for carriers in North America and globally.
One of Canada’s two largest airlines, WestJet Airlines Ltd. (TSX:WJA) has a relatively robust dividend yield of 2.4%, providing investors with income as well as capital appreciation upside; the company’s dividend yield was much higher previously, but due to a very nice run the company has had since 2011, the yield has correspondingly fallen.
This dividend yield is largely a beneficiary of lower costs of oil, as the company has reduced its oil hedging in recent years in response to decreasing oil prices and significant losses from the company’s derivatives segment.
While the price of oil appears to be hovering at a “newer normal,” investors have begun to worry about how $80 U.S.-plus oil will affect Canadian airlines, especially when factoring in a weaker Canadian dollar and other factors which could be headwinds for WestJet in the quarters and years to come.
To expect the current environment to remain unchanged for the foreseeable future is perhaps foolish, however it should be noted that a number of analysts are giving medium to long-term forecasts which align closely to today’s current environment.
As a long-term play on growth, WestJet may make sense as a dividend play for your portfolio. For those looking for defensive names, however, I would suggest looking elsewhere.
Invest wisely, my friends.
