Delta reinvestment plan credit negative: Moody’s

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Delta Air Lines' plan to spend $700 million in a stock dividend and buyback programme in order to boost shareholder value is a credit negative, says Moody's Investors Services.

The possibility of deteriorating demand, yields and operating profits in the airline industry could put pressure on the Atlanta-based carrier's free cash flow, says the rating agency in a report today. If this were to occur, Delta could be forced to balance the investor initiatives with debt repayment.

Moody's rates Delta B2 stable.

The plan is split between a one-time $200 million-$0.06 per share-dividend this September, $500 million in stock repurchasing during the next three years and a reduction in debt to $7 billion by 2017 from $10 billion at the end of 2012. It also includes $1 billion in additional contributions to Delta's defined benefit pension plans over the next five years.

"The planned annual dividend of $200 million is about 18% of trailing 12 months free cash flow of about $1.1 billion, which would leave a meaningful amount of free cash flow to support Delta's targeted reductions in funded debt and underfunded pension plans, as long as the company's recent operating trends are not disrupted by adverse fundamentals," says Moody's.

The agency cites lacklustre economic growth, the US federal government's sequester budget cuts and tax increases for its concerns for airline passenger demand.

Delta will also invest $2 billion to $2.5 billion annually in the airline during the next five years. Investments will be in fleet, facilities, products and technology.