After the bell, Boeing (BA) announced some very welcome news for investors (press release available here). Boeing raised its dividend by 50% to $0.73. Based on shares' closing price, the new dividend will yield 2.16%. At the same time, the company has launched a new buyback program with a $10 billion authorization. These capital returns come after shares have rallied 79% in 2013. Are shares attractive after this announcement or has the plane already left the gate on this bull run?
With a $500 billion backlog thanks to the 787 Dreamliner and 777x, Boeing has been the prime beneficiary of a commercial aviation super cycle and will see growing revenue for years. Even without another new order, Boeing could keep its factories running at capacity for five years, which gives you an idea of how massive its backlog has become. In response to this, the company is growing its shareholder distributions, and it is doing so at a faster rate.
As mentioned above, Boeing hiked its dividend by 50% while last year the increase was only 10% and the year before 5%. As its fundamentals rapidly improve, BA is accelerating the rate at which it returns cash to shareholders. With this new dividend, Boeing will be paying roughly $2.19 billion to shareholders next year. For perspective, Boeing has generated $11 billion in operating cash and $9 billion in free cash flow over the past twelve months. In 2014, I expect Boeing to generate about $13 billion in operating cash and $10.5-$11 billion in free cash flow. In other words while this dividend boost is gigantic, Boeing has the capacity to continue to raise the dividend at an exceptional pace for several years. This 50% dividend increase is just the beginning of things to come.
At the same time, Boeing has also launched a major buyback program of $10 billion. Its previous buyback was announced all the way back in 2007. That buyback was for $7 billion, but repurchases were halted in 2009 after the financial crisis. Last December, the company resumed repurchasing shares and has bought about $2.8 billion in shares over the past 12 months. There is $800 million left on that plan, so Boeing will be able to repurchase $10.8 billion in shares. There is no definitive timeline for when this buyback will end, but Boeing expects the plan to last 2-3 years. As such, I would expect the company to buy back about $4 billion in shares in 2014 (or nearly 4% of all shares at current prices).
When you combine both measures, Boeing will be returning about $6.2 billion to shareholders next year. This sum is about 47-50% of operating cash flow and 56-59% of free cash flow. In other words, capital returns are nowhere near the company's capacity especially as it continues to increase production, which will increase cash flows beyond 2014. Moreover, Boeing has a pristine balance sheet with a net cash position of $6.4 billion.
Boeing is setting up as a perfect stock for income and dividend growth investors. With its massive backlog, the company has significant revenue growth booked in the years to come. With the successful Dubai Air Show, the company has also been seeing orders outpace production, increasing the backlog even more. With lower fuel prices and lower capacity, airlines are more profitable than ever, which will keep demand for aircraft high. With its backlog and order trends, Boeing may very well be running at capacity for a decade. Boeing is perfectly positioned in the aerospace sector and will be delivering growth to shareholders for years to come.
Boeing is now using this growth to fund major capital returns to shareholder. The major dividend hike and buyback announcement shows how committed Boeing is to paying shareholders. Even after this announcement, Boeing is still generating significant excess cash, and with no net debt to pay down, I expect Boeing to increase payouts as a percentage of cash flow over the next three years. While the current 2.1% yield may not be superb, I expect the dividend to grow by at least 25-33% annually over the next three years. Even after the run in 2013, investors, especially those seeking dividend growth, want to be long Boeing.