Warren Buffett (Trades, Portfolio) is known for making bold bets and going against the grain by investing in unloved companies when everything seems to be going against them. Therefore, it didn’t come as a surprise when Buffett decided to bet on Delta Air Lines (NYSE:DAL) in the first week of March when the market was punishing the stock due to coronavirus fears.” data-reactid=”12″>Warren Buffett (Trades, Portfolio) is known for making bold bets and going against the grain by investing in unloved companies when everything seems to be going against them. Therefore, it didn’t come as a surprise when Buffett decided to bet on Delta Air Lines (NYSE:DAL) in the first week of March when the market was punishing the stock due to coronavirus fears.
Just one month after increasing its stake in Delta, however, Berkshire Hathaway Inc. (NYSE:BRK.A)(NYSE:BRK.B) decided to unload some of its shares in a surprise move. In a filing with the Securities and Exchange Commission on April 3, the conglomerate disclosed the sale.
Source: Form 4
Berkshire netted approximately $314 million from the transaction. With the salce completed last week, the conglomerate’s stake in Delta has decreased from 71.9 million shares to 58.9 million. It still owns about 9% of the total outstanding shares of the airline.
On March 13, Buffett told Yahoo Finance that he would not be selling airline stocks anytime soon even though signs of trouble were ahead. The sale is a complete contrast to this statement. The subject of this analysis is to determine whether investors should be alarmed by this sudden shift in the guru’s stance.
There was never a doubt about the Covid-19 virus negatively impacting travel and leisure sector companies. However, things have escalated at an unprecedented speed and, according to a recent Bloomberg report, nearly two-thirds of the global population is currently staying indoors to curb the spread of the virus. Amid this chaos, Delta Air Lines has received a beating in the market.
What is more alarming is that the company will most likely report a significant decline in revenue and earnings in the coming quarters. In a memo sent to employees on April 3, CEO Ed Bastian wrote:
“This week we closed the books on the first quarter of 2020, and it was unlike any quarter in Delta’s history. We know that the second quarter will be even more difficult than the first as the pandemic continues to evolve.”
He went on to reveal eye-popping numbers regarding the current state of business operations.
- On March 28, Delta carried 38,000 customers, in comparison to a daily average of around 600,000 in late March in the previous year.
- Delta is burning $60 million in cash every day.
- A total of 115,000 flights were canceled in March, which accounted for approximately 80% of the total scheduled flights for the month.
Based on these numbers, the company can only be expected to report a record decline in earnings for the first quarter of 2020.
Charlie Munger (Trades, Portfolio), it’s difficult to conclude that both these gurus did not see this coming. This is the primary reason that makes the sale of Delta shares an unusual occurrence.” data-reactid=”67″>Considering Buffett’s extensive history of making timely investments and the experience that he brings to the table along with Charlie Munger (Trades, Portfolio), it’s difficult to conclude that both these gurus did not see this coming. This is the primary reason that makes the sale of Delta shares an unusual occurrence.
Earlier in March, Delta confirmed its plan to file for payroll grants under the federal coronavirus aid package. According to the terms and conditions of these grants, Delta would have to suspend both its share buybacks and dividend payments through Sept. 30. Also, the recipients of these grants are expected to provide stock options, warrants or any other financial instruments to the government as compensation for arranging for the funds at this critical juncture.
Buffett is a big fan of both dividends and share repurchases. The guru famously praised Apple (NASDAQ:AAPL) in 2018 for its buyback policy and said:
“I’m delighted to see them repurchasing shares. You can say we own 5 percent of it. But I figure with, you know, with the passage of a little time we may own 6 or 7 percent simply because they repurchase shares. I find that you’ve got an extraordinary product, and ecosystem, and there’s lot to be done, I love the idea of having our 5 percent, or whatever it may be, grow to 6 or 7 percent without us laying out a dime. I mean, it’s worked for us in many other situations.”
The guru’s thinking is very clear. As long as a company executes buybacks, long-term-oriented shareholders can benefit by simply doing nothing as investors who do not sell their shares can own a higher percentage of a company without investing additional capital.
As illustrated in the chart below, the dividend per share has increased consistently over the last several years.
The story with share buybacks is the same. According to company filings, Delta repurchased $250 million worth of stock in 2013. Buybacks increased gradually and the company allocated more than $2 billion to buy its own stock in 2019.
Even though Delta will be legally able to distribute wealth to shareholders beginning Sept. 30, the company might continue to abandon such activities for many months or years to come due to the negative impact of the coronavirus. Buffett may have decided to curb his Delta stake partially because of this lower income expectation from the company in the future.
The conglomerate is still sitting on to a cash pile of over $100 billion. Therefore, thinking that Delta shares were sold to make way for a new company is irrational. If the guru wanted to invest a significant amount in a company that has recently entered undervalued territory, there’s a humongous amount of cash at his disposal. As such, it’s clear that the sale was a strategic move taken upon carefully analyzing the prospects of the company. What is more worrying is that Berkshire buys and sells stock based on long-term performance expectations of companies. Therefore, without the absence of a catalyst that would impair the long-term profitability of Delta Air Lines, a decision to sell shares would not have been made.
The worst is not over for Delta Air Lines. Even though the share price has already declined dramatically, when the company reports its first-quarter 2020 earnings, there’s only one way for the share price to go. Such a short-term phenomenon, however, would never have scared the likes of Buffett. If the guru decided to sell Delta shares because of the suspension of its dividend and buyback plan, Berkshire will most likely unload more shares in the coming weeks. This, in return, will create a dent in the investor sentiment and lead to further losses for investors.
There are a few catalysts that could drive airline stocks in the next few months. In the long term, however, most of these companies will survive as global travel returns to normal. However, staying as one piece until such time has already become a challenge for many leading companies operating in this industry. The best course of action for an investor is to do nothing and wait for more developments and numbers from Delta Air Lines to accurately assess what the future holds.
Disclosure: I do not own shares of any company mentioned in this article.
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