The aerospace giant, Boeing Co (BA), recently announced a 10% rise in its quarterly dividend, raising it to 48.4 cents/quarter from 44 cents/quarter. Despite the rising revenues and profits over the last 7-8 quarters, the stock has hardly climbed up. It seems like the investors are not impressed with the production capabilities of the company. The company's revenues are recorded on the basis of contract accounting. Therefore, the production rate holds massive importance for the company. Moreover, as 40% of the cash is paid by the final customer after the plane is delivered, the production rate is also important for the cash flows of the company. The market perceives that the company has been unable to expand its production facilities to match a rise in the demand for commercial aircrafts. Therefore, indirectly, the investors are concerned about the current liquidity of the company. This leads us to a very important question: Will Boeing be able to sustain its dividend?
The Dividend 'Checks'
In order to check whether the company will be able to sustain its dividends, we need to run the "liquidity test", which includes:
- An analysis of the operating and free cash flow from operations
- An analysis of the company's expected performance in the next year (near-term)
- An analysis of the company's decision to spend on the CAPEX and share repurchase in the future
OCF and FCF yields
The following chart shows the historical trend of the cash flow yields:
Both graphs show a considerable decline in the yields in the last quarter of the last year. However, this fall is not because of a decline in the cash flows. It happened because of a sharp rise in the number of outstanding shares. The following chart shows the shares outstanding for the last seven quarters:
*the figures are in million
The chart clearly shows how the number of outstanding shares rose at the end of the last year. Boeing did not issue any equity. The number of outstanding shares rose because the employees were compensated through share-based payment arrangements.
The company has also announced a solid plan to repurchase shares. It expects the repurchase program to total between $1.5 billion - $2 billion in 2013.
A Solid 3Q Earnings Report
Boeing posted solid results in the 3Q earnings release. The company reported an EPS of $1.35, down 6% YoY but well ahead of the consensus EPS of $1.12. The revenues increased 13% (on a YoY basis) to $20.0 billion. The revenues were driven by rising commercial aircraft deliveries.
The 2012 revenue, earnings and cash flow guidance was raised: Given a solid performance in both the commercial aerospace and defense businesses, Boeing raised the 2012 revenue guidance to $80.5 - $82.0 billion from $79.5 - $81.5 billion. The company also raised the EPS forecast to $4.80 - $4.95 from $4.40 - $4.60. The company now expects the operating cash flow to be greater than $5.5 billion for 2012 (the previous forecast was greater than $5.0 billion).
A rough estimate shows that Boeing's cash flow guidance implies a free cash flow amount (after CAPEX and dividends) of at least $2.4 billion in 2012. This is up from $1.1 billion in 2011. For 2013, I expect an FCF of approximately $2.7 billion after paying for the CAPEX ($2 billion) and dividends ($1.45 billion). Boeing generated $836 million of FCF in 3Q12, which was significantly up from a use of cash of $208 million a year ago.
The segment-wise results: The commercial airplane segment recorded operating earnings of $1.15 billion (up 6% YoY) with an operating margin of 9.5% (down 1.9 points). Higher costs associated with the new 787 and 747-8 were a drag on the margins. However, this is expected to improve over time as the R&D costs are expected to come down. Boeing's defense/space/security business had operating earnings of $827 million (flat YoY) in 3Q12. Margins for the defense segment were up 0.5 points YoY to 10.5%, which is a bright spot in a declining 'defense revenue environment'. Boeing Capital generated $33 million in operating earnings, up 74% YoY, and the leverage was flat with the debt/equity ratio at 5.0x.
The Backlog was up as the commercial aircraft orders increased: Boeing's total backlog increased by $3 billion sequentially to $358 billion. The rise in the backlog was driven by a $5 billion sequential increase in the commercial aircraft business which ended the third quarter with $305 billion in the backlog. The defense business had a sequential decline of $2 billion in the backlog to $52 billion.
The aircraft deliveries remain strong: Boeing delivered 149 commercial aircraft in 3Q12 (up from 127 a year ago). The company delivered 12 787s (up from only one delivery a year ago). Boeing stated in its conference call that it has delivered a total of 28 787s through October 24. Year to date, Boeing has delivered 436 aircraft (up from 349 a year ago). Boeing also stated in its conference call that it expects continued strong aircraft orders for this year, and the cancellations/deferrals are historically low.
Liquidity strong: Boeing ended the third quarter with $11.2 billion in cash and short-term investments (up $865 million sequentially). The Debt/EBITDA was 1.4x (flat sequentially).
Overall, it was a very solid quarter for Boeing with the strength in earnings and cash flows driven by higher commercial aircraft deliveries. The company's revenues are expected to grow in the future given its significant exposure to the healthy commercial aerospace sector which should continue to offset the declining defense revenues.
The following two charts show that the dividend is on a rise. The dividend yield has improved from 2.5% to 2.57%.
I believe that given the strong financial muscle of the company and rising aircraft deliveries, the company will definitely be able to sustain its newly announced dividend.