Southwest Airlines Co. (NYSE:LUV) will pay a dividend of $0.18 on the 2nd of April. Based on this payment, the dividend yield will be 2.3%, which is fairly typical for the industry.

See our latest analysis for Southwest Airlines

Southwest Airlines' Future Dividend Projections Appear Well Covered By Earnings

We aren't too impressed by dividend yields unless they can be sustained over time. Before making this announcement, Southwest Airlines was paying out a fairly large proportion of earnings, and it wasn't generating positive free cash flows either. Generally, we think that this would be a risky long term practice.

According to analysts, EPS should be several times higher next year. If the dividend continues along recent trends, we estimate the payout ratio will be 27%, which would make us comfortable with the dividend's sustainability, despite the levels currently being elevated.

Dividend Volatility

The company's dividend history has been marked by instability, with at least one cut in the last 10 years. Since 2015, the dividend has gone from $0.24 total annually to $0.72. This implies that the company grew its distributions at a yearly rate of about 12% over that duration. Southwest Airlines has grown distributions at a rapid rate despite cutting the dividend at least once in the past. Companies that cut once often cut again, so we would be cautious about buying this stock solely for the dividend income.

The Dividend Has Limited Growth Potential

Growing earnings per share could be a mitigating factor when considering the past fluctuations in the dividend. Over the past five years, it looks as though Southwest Airlines' EPS has declined at around 29% a year. Dividend payments are likely to come under some pressure unless EPS can pull out of the nosedive it is in. However, the next year is actually looking up, with earnings set to rise. We would just wait until it becomes a pattern before getting too excited.

The Dividend Could Prove To Be Unreliable

Overall, we don't think this company makes a great dividend stock, even though the dividend wasn't cut this year. The track record isn't great, and the payments are a bit high to be considered sustainable. We would probably look elsewhere for an income investment.

Market movements attest to how highly valued a consistent dividend policy is compared to one which is more unpredictable. At the same time, there are other factors our readers should be conscious of before pouring capital into a stock. For example, we've picked out 2 warning signs for Southwest Airlines that investors should know about before committing capital to this stock. Looking for more high-yielding dividend ideas? Try our collection of strong dividend payers.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.