Boeing (BA) and Airbus (OTCPK:EADSF) operate as a duopoly in the large commercial aircraft segment. These companies are the crème de la crème of man's desire to understand/control his surroundings. One hundred years ago, people would've looked at you funny if you mentioned that you had a flying machine that could take you anywhere around the world. And now, we have this duopoly that controls the aerospace commercial transport market.
Although some dividend-growth investors shy away from "Frozen Angles," this article will attempt to show why either Boeing or EADS should be considered part of a dividend-growth portfolio.
The Recent Past and Present
Although there have been economic cycles in the past for these companies, there was hardly any slowdown during the great recession. The following chart shows how Boeing saw a slight decrease in deliveries in 2008, while Airbus kept going up.
The commercial aerospace industry has been going strong for 60+ years and should continue for another 60. Boeing sees a demand of 35,000+ NEW planes over the next 20 years while there are currently 20,000 planes in service. Airbus sees similar numbers going forward. Both companies have over 4000 planes on backlog. The waiting list for the Airbus A320NEO is over 7 years long. 7 years! Imagine the amount of pricing power these companies have.
Although the duopoly may face competition in the smaller segments (100-190 seat range) due to new entrants from Bombardier or China or Russia, I believe these worries to be overblown. It's one thing for China to reverse-engineer a Cessna 182 and start producing its own version. It's quite another to reverse engineer a new 787 Dreamliner. The amount of experience it takes to engineer, manage and certify a large commercial aircraft is orders of magnitude more complicated than small general aviation aircraft.
Although the new entrants claim to provide a significant efficiency leap, most of the gain takes place in the engine. Can Boeing and Airbus slap on new engines too? They sure can: the 737-MAX and A320-NEO. Although these new versions may not be as efficient as the newer entrants' planes, it closes the gap significantly. Plus, the newer entrants still have yet to produce a plane and prove it's safe. They will be catching up for a long time.
Do you know why Southwest Airlines is one of the few airlines that actually have positive earnings? One of the reasons is that it nly uses the Boeing 737 family of aircraft. This is not to say that Boeing's aircraft is better than Airbus'. But by having only one type of aircraft, it saves bags of money by setting up its gates any way it wants and it trains its employees only one time. Buying multiple types of aircraft requires an airline to have multiple types of mechanics, multiple inspection plans, multiple repair manuals, several types of training for pilots and flight crew, limited gate configurations, etc.
The point I want to make is that it's extremely costly for an airline to switch to buying a new type of aircraft, let alone using an OEM that is still in training diapers. If an airplane switch is being performed, there must be a gigantic leap in efficiency between the new plane and old plane. Since the duopoly already controls the market, the companies will always have a step ahead going forward, and can always innovate enough to be at least on par with the new entrants.
Include Commercial Aerospace in your Portfolio
Both Boeing and Airbus' parent company, EADS, could be included as long-term, core stocks in any portfolio. These are quality companies with extensive moats and high barriers to entry. Some of these barriers include: pricing power, IP moats, regulatory moats, product complexity moats, and high switching costs.
Boeing's earnings are steadier due to the military side and it has a 5-year projected earnings growth of 13% CAGR. It's currently selling at 19x earnings, so it's somewhat expensive, but not excessively so, especially if you plan on holding for at least 5 years.
EADS is currently selling at 27x earnings but has a forward P/E of 13.4 (according to Morningstar). Although EADS has some other business units, Airbus runs the show. Therefore, EADS is more of a pure-play on the commercial side.
As a dividend-growth investor, Boeing has the greater appeal due to quarterly payments and higher dividend yield. It has increased its dividend 8 of the last 10 years. Like most European companies, the EADS dividend is based upon the underlying earnings, which can vary, while paying a yearly dividend.
For either company, I see increasing earnings and dividends for the foreseeable future. For those who use the strict 5-years of dividend growth rule on their dividend growth portfolio, I'd suggest allowing an exception for Boeing or Airbus.
I'd recommend buying either of these companies on dips due to fires/crashes/etc. As always, do your best research on any company before buying. I always recommend being a long-term investor.