Did you invest in Southwest Airlines’ IPO? This is what you should have today

on Nov 24, 2019
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  • If you invested $99 in Southwest Airlines when it was going public, you’d have about $155,422 today
  • The airline’s shares have been split 14 times over the past 40 years
  • Today, a share in the company goes for about $57.50 against its IPO price of $9

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We’ve all been told how holding stocks for the long term can
be rewarding. But what most us never seem to get right is how long is “long
term”? Well, for those who invested in the Initial Public Offering of Southwest Airlines
(LUV)
back in 1978, they’re reaping the benefits of long-term investing
today.

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Before delving into the numbers, here’s a brief overview of
why the airline has achieved tremendous success over the last four decades.

Budget air travel

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When the airline opened its doors in 1971, it was serving
three cities, Houston,
Dallas, and San Antonio using three Boeing 737 planes each with a capacity of 112
passengers. While the firm was barely surviving with an average of 16 passengers
per flight, the management maintained low costs while providing affordable flights
and by 1973, the company finally hit its first profit.

By 1978 when it went public, the company had a fleet of 13
planes flying about 3.5 million passengers per year, averaging $80 million in revenue. The
airline was still operating within Texas but on its 1978 annual statement, it
outlined its long-term plan of decades of profitability.

The airline decided to focus on short flights, low prices for customers,
high utilization, and short turnaround times on the ground, thereby eliminating
complexities while maintaining budget flights.

Other than being famed for affordable air travel, the airline
also added a touch of “warmth and personal concern basic in our service
approach” to the way it interacted with its staff members. The formula has
been used for decades, leading to a win-win
situation for both shareholders and the company
.

The numbers tell it all

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The airline priced its shares at $11 and the first trade
took place on June 8, 1978. Now, assuming you bought 9 shares at $99 in 1978,
how much would you possibly have in 2019?

To begin with, you’d need to adjust the number of shares
owned on a cost basis to provide for the 14 times the stock has split over forty years. Stock splits
are similar to slicing pizza, you can obtain more slices (shares) upon slicing
a larger piece but the total value doesn’t change (size of the pizza). However,
every slice (share) is worth proportionally less.

Upon
adjusting for the splits throughout history, the 10 shares purchased at the
start would result in 2,703 shares each costing 3.7 cents.

Well,
as we speak, the value of each stock is approximately $57.50; this loosely translates
to a whopping $155,422 worth of investment.

Think
of it for a moment: the value of your initial investment would be worth about 1,570
times more. This is perhaps why compounding has
been described as the eighth wonder of the world.

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