Why Warren Buffett Loves Southwest Airlines Co (NYSE:LUV), and You Should Too


Southwest Airlines Co (NYSE:LUV) is an important airline stock, which garnered the attention of the market earlier this month after JPMorgan gave a bullish outlook for the stock. JPMorgan’s analyst Jamie Baker increased his price target for Southwest to $66 from $60. The analyst also gave an “Outperform” rating to the stock. Southwest has been able to deliver a sustainable performance despite the difficult industry environment. The airline sector is tricky, mainly because of higher fixed costs, cyclical nature, capital intensive market dynamics and mobility of assets. For example, airline stocks took a hit due to the recent hurricanes in the US. But Southwest has continued to withstand the turbulence. The company has been profitable for the last 44 years.

Southwest Airlines Co (NYSE:LUV) is up over 12% since the start of this year. Southwest has a dividend yield of 0.91%. But the company has raised its dividend at impressive rates over the last five years. Earlier this year, Southwest increased its dividend by a whopping 25%.

Southwest Airlines Co (NYSE:LUV) is swiftly gaining market share with its strategy of budget flights. The company is also offering multiple flights at different times of convenience to beat its competitors. Unlike its competitors, Southwest uses just once class of airplanes (Boeing 737). This strategy has helped the company reduce costs significantly. Southwest is the biggest domestic air carrier in the US in terms of total domestic boarded passengers.

Southwest Airlines Co (NYSE:LUV) excessive focus on low costs has made the company successful. As of the end of 2016, Southwest has over 24% market share, compared to 18% market share held by the company in 2006. The company has also managed to increase its margins to over 9.5%, compared to just 2.5% in 2012.

Southwest has the backing of Warren Buffett. Last month, Berkshire Hathaway filed Form 13F which revealed that the Oracle of Omaha had cut his stakes in United Airlines and American Airlines in the second quarter. But the billionaire didn’t reduce his hold on Southwest.

Southwest Airlines Co (NYSE:LUV) crushes all of its competitors in terms of balance sheet health. Southwest is the only company among the major airline stocks which has a positive net cash. Analysts think that a healthy cash flow will help Southwest in case of interest rate hikes and policy restrictions.

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