Does JetBlue’s Turnaround Plan Have Wings?

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We still think this is a great time for dividends, especially as we look for rates to come down just a little bit from where they are right now.

Hello and welcome to the Barron Streetwise Podcast. I'm Jack Howe, and the voice you just heard is Grace Lee. She's a portfolio manager with Columbia Threadneedle Investments overseeing, among other things, their Dividend Opportunity Fund. In a moment, we'll hear about 3 of Grace's favorite dividend-paying stocks. First, we're going to say a few words about JetBlue's big week and the new details on its turnaround plan. Listening in is our audio producer Jackson. Hi Jackson.

Hey Jack.

You got Olympic fever over there? What have you gotten most wrapped up in so far?

Oh, I've loved the surfing. It's just a great—

It's like the furthest away from the main venue they've ever been to do Olympics, I heard.

The complete opposite side of the world. So you don't really get much mingling at the Olympic Village over there.

It's same planet still. They're still on planet Earth.

Yeah, I like it because you could just turn it on and, you know, 75% of it is just the surfers waiting to catch a wave. So that makes it like the perfect thing to have on all day in the background. What about you? I'm guessing you like a little more of an active spectator sport.

I'm agonizing over the gymnastics and the swimming. I've been loving the basketball, and there's always new people that you learn about or sports you learn more about. I saw the greatest photo and headline from our friends at the Wall Street Journal. It's kind of— I don't want to say a Harry Potter-looking kid, but he's got glasses, got the tongue sticking out. He's looking up at— you're not supposed to say ping pong, it's a table tennis ball. And his grip, I don't even know how to describe his grip on this thing. It looks like a practical joke. Looks like he's making fun of someone's grip, but that's his actual grip. And the headline is, there's a LeBron of table tennis. His name is Lebrun, and apparently this kid is French and he's amazing at table tennis.

I love the photo. His tongue is out there. You just see the concentration. He has the Harry Potter glasses.

Looks like he's casting a spell on that ball. Anyhow, best of luck to you, Lebrun, except if you're going up against Americans.

Got to root for the red, white, and blue. By which I mean our red, white, and blue, not the French.

Not their— right, not the red, white, and blue with the wider stripes. All right, so big move for JetBlue stock this past week, up 12% in a day after the company reported quarterly earnings. Jackson, are you a JetBlue flyer? How many times have you flown JetBlue?

I fly JetBlue every time. They're the least expensive airline.

So you're not even a New Yorker. I thought JetBlue was, you know, I mean, 50% of their flights involve New York. Where are you flying them from?

I'll fly them from LA to New York to, uh, visit my, uh, my grandparents.

Yeah, gotcha. Very strong in the New York to Florida. Yeah, it's retirees visiting their families who live in the boroughs, or vice versa. In my family's case, it's trips to Disney. We've flown JetBlue plenty. That stock had collapsed from over $20 a share a few years ago to well under 5. I'll tell you what's gone wrong and what might be going right, kind of, sort of, although it might take some time to play out. JetBlue was founded around 25 years ago by a Brazilian-American entrepreneur, and they grew over the years by— how would you say, Jackson— offering premium perks to passengers in an all-economy flight. Is that a good way to put it?

They're the first airline I remember flying with the TVs in the seats right in front of you.

Seatback entertainment and leather seats. Right.

And the key to that is everyone gets to watch their own thing, right?

Well, I can't remember how, how did the world decide which movie to watch back when there was like one screen for so many rows?

I think it was just Home Alone 3 every time.

They would just play what they were going to play. You didn't get a choice.

And if you're in the wrong seat, you had to crane your neck up or have really good vision.

Right. And there was other stuff added over the years. There, there was free Wi-Fi. JetBlue had free checked bags. There were the blue potato chips. Everyone loves the blue potato chips. At one point, JetBlue had its own blue potato farm to feed into its blue potato chip operations, which were done by a company called Terra. The free blue chips are gone. You can no longer call JetBlue a blue chip stock. You see what I did there, Jackson? I'm embarrassed enough for the both of us, don't worry. The free bag check, that's long gone. They charge for that. They still have a little more legroom than the competition. That's a selling point. I think some of their other perks have become a little more commonplace.

And they also had relatively low fares, and that was popular.

And it was this egalitarian flying because you didn't have to do the walk of shame past first class. I'm like an opportunistic first-class upgrader. I'll do it only when it's a good deal. So like when the kids were small, I made the mistake once of taking, taking them in first class. And for the next like 5 flights after that, we would walk through first class with the kids saying, Dad, how come we're not sitting up at the front? I want to sit up at the front. Why are we going to the back? The first-class people were polite enough to avert their eyes in pity for me at least. All right, so JetBlue has more than 100 destinations across the U.S. There are a handful in Europe, and there are plenty in the Caribbean and Latin America. And about half of its flying involves New York. That cuts both ways. It's the largest U.S. market for airlines, and it's capacity constrained. Even if you could find more acreage or more airspace, you still wouldn't have nearly enough air traffic controllers. There's a dire shortage there. And those constraints keep price wars in check. The problem is they also make for high delay rates for New York passengers. And that's at a time when passengers are paying more attention to these reliability rankings that you see published now and then. So that has not helped JetBlue. Now, I don't know if you can still say that JetBlue flights are still just one class because they do have these seats branded Even More Space, and they're set apart with some different trim, and you pay more and you get a little more legroom. There was a review late last year from a blog for airlines called thepointsguide.com, and it raised the question of whether even more space seats are worth it anymore. It cited examples where they cost way more than premium economy seats on competing airlines. That was for certain flights, certain posh flights like, um, Westchester County, New York to Palm Beach, Florida. If you're on that flight, you probably got some cash. You're maybe not quite as price sensitive as the flyer who's going from, let's say, LaGuardia to Orlando. And so those Even More Space seats were selling for way more than ones on other airlines. But I don't think that's a bad sign for investors at all. It's a sign of JetBlue's pricing power in some of its routes. The problem is that apart from a service called Mint, that's a first-class service that JetBlue offers on select routes, some coast-to-coast routes and some overseas ones, apart from that, it is according to JP Morgan, quote, currently sitting out the domestic first-class market— basically the market that Delta has successfully monetized, having lifted its paid domestic load factors from about 15% to over 70% since 2009. Load factor is industry jargon for butts in seats, and paid butts in seats are better than free ones, and paid first-class butts in seats are the best kind. So what JP Morgan is saying is that Delta used to give away a lot of those first-class seats for free, upgrades and so forth, and now it's found ways to charge for most of them. That's been great for Delta's profits. We had Delta CEO on this podcast recently and we talked about that, and one of the keys to Delta doing that has been its high reliability scores. Even if JetBlue had those scores, it wouldn't have the first-class seats yet. I'll come back to that. Now, there are some other problems here, both general and specific to JetBlue. The analyst at Melius Research writes that only Delta and United Airlines have earned the right to grow, but that hasn't stopped the rest of the airline group from growing anyhow. Melius estimates that US domestic capacity increased 6% in May and 7% in June and 6% in July. And that has created some overcapacity, which has kept record travel demand from translating to healthy profits for the entire airline group. We've also had rapid wage inflations for pilots and flight attendants, or if you are a pilot or flight attendant, good raises, you would call those. And JetBlue in particular has been hit by an issue with new Airbus planes that have defective Pratt Whitney engines. Those require early removal. So the upshot is that this year so far, JetBlue has had an average of 11 of its aircraft on the ground. It says that could rise to a mid to high teens number next year. Okay, so early this year, activist investor Carl Icahn amassed nearly a 10% stake in JetBlue stock. That's a sign that he sees good value there and that he's going to agitate for management to make the change he wants. This was just after a court blocked JetBlue's attempt to merge with Spirit Airlines. That's a no-frills carrier that— how did you describe it to me, Jackson? You have to stand on your head to save $40.

Uh, the planes are clean. And as long as you wear all your clothes at once, you don't get hit with too many fees.

That's right. That's right. You were wearing 17 layers at one point.

Okay.

So the merger fell through. Icahn is in. His publicly traded investment vehicle, Icahn Enterprises, has not been wrapping itself in glory. It's lost 36% over the past 10 years while the S&P 500 has returned 245%. Also, Icahn bought an airline back in the 1980s. It was called Trans World Airlines, or TWA, and he made money, but the airline ended up filing for bankruptcy. But none of that means that he's wrong about JetBlue today, that there might be good value there. Let's talk about some positives. There's a new CEO. It's a company veteran named Joanna Geraghty. This past Wednesday, she gave a quarterly report and a strategy update. Both were well received. JetBlue turned a surprise quarterly profit on cost cutting. It detailed plans to defer $3 billion in capital spending. Basically, instead of receiving all the aircraft it had planned in the years ahead, it will defer some of those past 2030 and instead extend the use of current planes. It's also cutting cities and routes that aren't profitable enough. Baltimore and Bogotá are out. And San Antonio and Burbank look like they only have a few months left. The Los Angeles to Las Vegas route is gone. Soon, so will the Boston to Charlotte route. JetBlue says it'll find between $800 million and $900 million in additional yearly earnings before interest and taxes over the next 3 years. That includes $400 million from premium services. There are not a lot of Wall Street bulls on JetBlue stock, but analysts mostly like what they heard, and they say that JetBlue is showing better urgency than its peers to make improvements. But they also say that results will take years. Raymond James rates the stock at market perform or neutral, and it recently took its estimates for next year's loss from a nickel a share to 50 cents a share. That's partly due to those engine-related plane groundings. It expects that net debt will rise next year and that a return to $1 per share in earnings is, quote, unlikely until 2027 at the earliest. So in other words, things are moving in the right direction, but it will take some time. JPMorgan is also at neutral. It writes that Wall Street unfairly lumps JetBlue in with ultra-low-cost carriers like Spirit, and it predicts that JetBlue will soon announce a new first-class service. Probably part of that $400 million in new profits the company says it wants to get from premium services. The problem is JetBlue might have company there. Seaport Research Partners writes premium seats are likely the next new revenue battleground. I mean, everybody sees that Delta's making good money there and everyone wants in. Seaport is one of the few buy-rated firms on JetBlue, but it wrote this past week, this is a name we've gotten wrong. Also wrote, it's a tough slog back to profitability, and quote, shares will likely continue to trade poorly until this fall. That sounds pretty gloomy for someone laying out the bull case. Maybe all that gloom and caution means in a contrarian way that there's some upside left here for the stock. But even after this past week's 12% one-day jump, the stock is still underperforming for the year. Continued gains from here will depend not just on JetBlue's action but also on overall travel demand and supply cooperating. Melius writes, if you squint hard enough, the setup for 2025 is improving. So there you have it. If it doesn't look like things are getting particularly better in airlines, maybe you're just not squinting hard enough. Anything to add, Jackson?

I think I have some ideas to extract more revenue.

I was afraid you'd say that.

Hit me. People on the plane bid with the person sitting behind them for the right to put the seat back.

Or you could turn it into a gambling situation where you start off with your seat at a neutral angle and then you place a bet and it either gets better or worse depending on whether your bet pays off. It's got potential.

You might end up leaning forward for the whole flight.

Jackson Southwest, I've never flown them, but that's one of those where it's all one class of passenger and they're going to have seats with more legroom soon. So they're doing kind of a JetBlue thing. And JetBlue, I think, is moving to a more traditional first class offering. We'll have to see about that.

Yeah, it seems like all the airlines are kind of getting more similar.

It does. I feel also like first class pricing has become a closer call more often. As I said, I'm a cheapskate upgrader, right? If you show me a flight and it's a $500 flight and then first class is $5,000, I'm not upgrading. I'll make do in coach. But that flight I took recently to Kentucky, that was, I want to say about a $250 flight economy, and they had a first class ticket for around $450. So I'll do that. But there is still some weirdness in pricing because you're gonna think I'm making this up, but it was $450 if you took the flight with no flexibility to change or cancel. In other words, if you didn't go on that flight, you were out of luck. But if you took the flight that had flexibility to make changes It was $10,450. So you just— so you paid $10,000 extra for the right to make a change on a $450 flight. I, uh, I didn't see the value in that upgrade, so I left it alone.

I put the flexibility premium at 20% personally.

Such a specific number. You know what, I'm writing that on the chalkboard.

It's one out of every 5 flights. I imagine something will come up and I'll have to change it. So if it's, you know, less than 20%, all right.

A beautiful mind. You've done the game theory math of this, I see. Let's take a quick break, and when we come back, we'll speak with Grace Lee from Columbia Threadneedle about some dividend-paying stocks.

That's next.

Data is everywhere, but is it ready for consumption? Morningstar developed the the language of global investment data so you have the right ingredients to help you shine. Morningstar, where data speaks. Hi, I'm Kelly Cavanearo, Managing Director, Head of North America Institutional Distribution at Janus Henderson Investors. We believe working together is the way to work better, like combining your portfolio plans and our in-depth strategy, your valued assets and our valuable insights, your mission and our vision working in harmony to seek the right investment opportunities. Janus Henderson Investors, investing in a brighter future together. The Federal Reserve this past week did not cut interest rates, but it did give indications that a rate cut could be coming in September, and that makes Income-paying assets more attractive? The yield on the 10-year Treasury, which falls as the price increases— at one point this past week, that dipped below 4%. What would falling rates mean for dividend-paying stocks, and which dividend-paying stocks are attractive right now? I asked those questions of Grace Lee. She's a portfolio manager at Columbia Threadneedle. Let's play part of that conversation. Is it always a good time for dividends? Is it a particularly good time now? What should investors be thinking about dividends?

Well, we like to think that it's always a good time for dividends, but I think probably, you know, the last 15 years or so, it was a great time for dividends because there were not very many income options. And right now that has clearly started to change. You know, bonds obviously have pretty attractive yields and people can earn 4 or 5% in their cash. But our fund in particular focuses on higher yielding stocks and we try to generate a higher yield for our clients. And we think starting out with a reasonable dividend and having upside from equity participation is always a great place to be. So yes, I think this is still a great time for dividends.

Can you tell me about a few names that investors should be thinking about right now? Some of the favorites that are in your portfolio that have attractive dividend yields.

Yeah, I would say one that we bought fairly recently, 3M recently did have a much higher dividend yield and they cut that to a much more sustainable level. It's still attractive. And, you know, we bought that specifically because they reset their dividend to a much more attractive level. They had new management coming in to help turn that business around and there is so much low-hanging fruit in that company. We just had management in the office yesterday, and Bill Brown was basically talking about all of the efficiencies. And this is not simply cost cutting, it's really redirecting and reallocating their spend to more productive areas.

How do you figure that out? Because they make so many things. So somebody could say, hey, it's going to be a big year for tape for adhesives or whatever. It's like, okay, that's one little piece of the business. What about everything else? So how do you figure out when it's the right time and when the business is moving in a positive direction when there are so many products?

I would say that the business is very diversified, and that's one of the things we really like about it. It's less about a cyclical play where, okay, something's gotta work right in the cycle. It's really about, um, a self-help story in that They've been mired in a lot of legal issues around their PFAS manufacturing, but the company's been very distracted for a number of years. And I think new management is really going to be able to bring the focus back to the basics, which is turning around the operations again, focusing on efficiency and redirecting. I think the most notable example of this is that, and he mentioned this on their earnings call, their Command Strips, which I think we all know of, where you hang the pictures and stuff without nails, touches 5 factories and 2 distribution centers, which is a crazy thing when you think about that. And so if you apply that sort of thinking and think that there could be examples of this type of, you know, likely inefficiency all over the company, think of how little it takes to improve that.

And you mentioned PFAS. So now I have to try to pronounce it for people to spell it out. Poly— I'm looking at the word here. Polyfluoroalkyl— alkyl?

Polyfluoroalkyl substances. I like to just call it PFAS.

Basically long-lasting plastics, right? And the concern there is environmental damage. And so that's an overhang for the— these are chemicals that have been used for decades and that's an overhang. But you say that's kind of priced into the stock here and there's a lot of other good things going on.

Exactly.

What are some others that you like?

I would mention Citigroup as an example. I would say the blueprint for why we like that is pretty similar. It's a new management, a transformation, business transformation story relative to the peer groups, which is pretty much, you know, think of JPMorgan, BofA, Wells Fargo. Citigroup still yields over 3%, whereas the other ones are somewhere in the 2-ish range. Again, this is something where you take one example and, and it speaks volumes about where the company's headed. Jane Fraser, she's willing to jettison, you know, sort of sacred cows. She's gotten rid of businesses that were perfectly fine under Citigroup, but they don't fit in her strategy. So they shut down munis, which is an area where they were a leader. And I think that, that points to what direction the company is headed and what types of hard decisions they are willing to make in order to transform the business into basically a higher-returning bank, which is what they really need to do.

What are the most attractive parts of that business? Like, what if they're— if they're getting rid of some business lines, what are the ones where they want to really get behind them? Is it commercial banking, consumer banking? Is it asset management?

Is it— So it's actually, they had a whole day on basically their servicing business. And that's a lot of behind-the-scenes movement of money across borders. It's very complicated, tough to describe, not sexy, but that's an area that they are very well positioned to grow. Wealth management is another area where they are. I think that's an area where a lot of companies are looking to grow, but that's one where, again, they've got a lot of multinational clients and it's an area where they probably probably underpunched currently.

Stock picks, as you know, must come in a minimum size of 3. We can never have just 2. Can you tell us about a third stock that you like?

Yeah, we've owned AbbVie for a very long time. That's the large pharmaceutical company that has Humira. And that's one where we probably increased our position back when they bought Allergan, which was obviously the maker of Botox. People got a little bit nervous. A lot of investors got nervous about the amount of debt they were taking on. And I think at that point the stock was yielding probably closer to 5-ish percent, maybe even close to 6% on the dividend yield.

I'm sorry, the knock on AbbVie originally was that they had this bestselling drug Humira for rheumatoid arthritis, maybe some other things, this injectable drug. And it was an enormous seller such that it kind of dominated the company's revenues. And you look at that and you say, Well, that's great, but what happens if the patent exclusivity for that drug goes away at some future date? And so that's the risk. But I always think that's an easy problem to fix because either you buy something big or something big buys you, and then you're diversified. So they've bought the company that makes Botox and now it's a more diversified company. What are the growth trajectories like for— is Humira still making good money? What's the trajectory like for Botox and that kind of stuff?

Yeah, so Humira is certainly on the, I would say, the downswing. You know, the last year or two, we've been hearing more concerns about generics and biosimilars and all the risks there. But AbbVie has two other products. They're probably easier to pronounce than the PFAS word, But they have Skyrizi and Rinvoq, which are basically taking the mantle from Humira and also treating a lot of these inflammatory conditions. And those two drugs are doing fantastic, showing a lot of growth. And they've really been able to manage the decline in Humira by growing through Skyrizi and Rinvoq. And they've made a couple of interesting acquisitions. And they have Botox, which does not have a patent cliff. Per se. It's, it's there forever and goes through cycles, but it's, I think people are always going to be wanting to look nice and have their aesthetic improvements.

Let's say I've heard that about people. Yes. And that's a 3.3% dividend yield and Skyrizi. I don't know anything about the drug, but, and I don't know whether you have any middle schoolers in your life, but I do. And so you hear there's a lot of nonsense words that they're saying all of a sudden. One of those is RIZ, which is short for like personal charisma. Like he or she has a lot of rizz. And the other one is the word skibidi, and I don't know what it means, but you hear it all the time from these kids. So sky rizzy sounds like a word that middle schoolers would be saying right now. So those two products you say are, are commercially promising.

Yes, yes, exactly.

Let me just ask what you think of the broad market here for investors who've seen some of the wobbling that has happened over summer in tech names., and they're wondering, you know, can the good times keep rolling here or should I do some repositioning? What do you think is coming over the next year or years for, you know, the typical 60/40 investor?

I think the market has been pretty concentrated over the last year or so. And I think that especially with rate cuts, you're going to have a little bit more of a democratic market. I was looking back at the way the market shook out last year and probably 2 industry sectors, maybe 3, were actually positive on the year and everything else was actually negative. I think people have stuck with things that have worked for a very long time and it has been a very long time as we've had a zero rate environment for 15 years up until very recently. So it's going to take a little bit of time, I think, for, for people to convince themselves that there's other things that can work. But I think we're starting to see that.

So I shouldn't put my whole 401(k) in the Nvidia 3x levered ETF. I should maybe think about some of those dividend stocks instead. Right. It makes sense to me. Yeah. Thanks very much for taking the time to speak with me.

I appreciate it, Grace. Great.

Thank you. And thank all of you for listening. Jackson Cantrell is our audio producer. Jackson, what are you watching next at the Olympics? Is it fencing or field hockey? Pistols? What's it going to be?

Yeah, I like— I've never watched the air pistol event, so I think that that's got to change. And rock climbing too.

Are you making that one up? That's a real one.

No, there's rock climbing.

Yeah. How do you— how do you judge? Is it who gets up fastest? It's got to be who gets up fastest, right?

There's speed and then there's something called combined, which includes lead climbing and bouldering.

I do. I want to ask you what— no, I'm not going to ask you what bouldering is. I'm going to assume that it involves a bunch of athletes carrying a boulder up a mountain over their heads. If I got that right, these are strong people.

Not quite, but I'll give you some style points.

You can subscribe to the podcast on Spotify or the other ones, Apple, wherever you listen. If you have a question you'd like answered on the podcast, not really about bouldering, but more like finance, You can tape it on your phone, use the voice memo app, and email it to jack.hough@barons.com. You know what, let's do something new. If you have comments on anything we've talked about in this episode, go ahead and send those too. We've gotten some interesting listener comments recently, and a few crazy ones, but mostly interesting ones. Thanks and see you next week. Data is everywhere. When orchestrated properly, it sings. At Morningstar, we analyze and enrich data, making it actionable and powerful for you. Morningstar, where data speaks.