Dividends and LATAM becomes largest global airline to file for bankruptcy amid pandemic

For generations, for many people, going to or near the airport and watching the planes take flight has been an enjoyable experience. The people on the ground watching and thinking about the travellers going around the world for business and pleasure. Eventually, they look at the names on the planes and take pride in their home town carriers. If you want to travel to South America, one of the airlines you may fly on is called LATAM.

LATAM was born in 2012 through a merger of Chile’s LAN and Brazil’s TAM airlines. The airline has more than 40,000 people working for it and dominates international travel in Brazil, Columbia, Chile, Argentia, Peru and Ecuador.

In article by Marcelo Rochabrun, Fabian Cambero and Tatiana Bautzer of Reuters, due to the COVID virus where every country has shut down travel, the airline began to bleed money and has filed bankrupcty. This was unfortunate because some airlines around the world fly to keep the host government happy and lose money, LATAM has made $700 million over the past 4 years.

Its ownership includes the Cueto family, Qatar Airlines and Delta which last year paid $1.9 billion for a 20% stake. The shares trade in New York and Santiago. The issue is will the government bail out the airlines similar to Germany bailing out Luthansa for a 20% stake. Similar to other airlines around the world, in Chile LATAM is considered a strategic company for the government.

LATAM said it had $7.6 billion in debt, the company has been downgraded by S&P and Fitch after the company did not pay interest and principal on $1 billion in debt tied to the financing of new aircraft purchases. Investment bank Moelis & Co is representing bondholders representing $3 billion in debt.

Linking to dividend paying stocks, what often seems simple is complicated. Prior to the COVID shutdowns, LATAM recently paid a dividend to the shareholders and the company was seemingly doing most things right. There were very good reasons to invest in the company and given its leading domestic position in the South American market, it looked like a long term hold. COVID happened and everything has changed quickly. LATAM is fortunate to have strong partners and potential government support for the correct reasons, however it has no cash flow. Not every investment works out, but if you do your homework and understand why the investment should work out, you can determine if the stock is worth holding or finding alternatives.

There are more questions than answers, till the next time – to raising questions.

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