This article focuses on Boeing's (NYSE:BA) Commercial Airplanes segment which will be the company's growth driver for the foreseeable future. In this context, it is assumed that earnings from Defense, Space & Security will remain flat in the next years.
The long-term outlook for the commercial aircraft industry is very positive, as air travel and consequently the demand for new airliners will continue to grow above GDP for at least 20 years. Boeing has only one competitor: the Airbus Group (OTCPK:EADSY) and it cannot be expected that a third manufacturer of airliners beyond regional jets from countries like China or Russia will arise in the next decade. Boeing's large order backlog safeguards revenue growth for several years if the company is able to ramp up production rates further. The "only" thing the company has to do is to translate this fact into profitable growth to satisfy its shareholders.
In 2013, Boeing delivered 648 commercial aircrafts, 47 more than in 2012. In the same period, revenue increased from $49B to $53B. For 2014, Boeing guides to 715-725 deliveries and $57.5B to $59.5B revenue, a plus of > 10%. This growth is attributed to a higher number of 737s and the production ramp up for the 787 (110 deliveries are taken into consideration for the guidance, up from 65 in 2013). The latter is also the biggest uncertainty factor, given the severe delays and the multiple issues during the 787 program.
Boeing has just released its delivery figures for the first half of 2014. Extrapolation of the data until year end suggests deliveries in the mid of Boeing's 2014 guidance. Based on the expected production rates, a scenario for the number of 2014-2018 commercial aircraft deliveries can be developed. It is based on the following assumptions: 737 production increases from 42 per month today to 47 in 2017; 747 and 777 remain stable at 18 and 100 aircrafts per year; 787 production stabilizes at 10 per month for the second half of 2014 and climbs further to 12 per month in 2016.
Again, the biggest question mark is if the 787 target can be met and when the program will finally become cash flow positive and profitable. During Q2 2014, Boeing delivered 30 aircrafts, achieving its goal. The next steps will be keeping this rate for the rest of the year, while introducing the 787-9 into production and finally to increase output further within the next two years.
The following table shows calculated commercial aircraft revenues until 2018 based on the number of deliveries at today's prices. The order volume is based on the average unit cost for each aircraft type from the official price list, however the real revenue is significantly lower after rebates. From the 2013 actual revenue of $52,981M and a calculated order volume of $96,700M, a factor of 54.8% results which has been used for the years 2014-2018 as well.
Predicted Deliveries by Aircraft Type and Revenue
Source: Own Calculation.
Consequently, at today's prices revenue would grow annually at a CAGR of 6.6% from $53B in 2013 to $72.8B in 2018 or by 37% in total. These figures do not include price increases which will further add to the top line.
In the end, not revenues, but earnings and cash flow determine how much dividend Boeing is able to pay its shareholders.
Boeing generates a lot of cash and has a healthy balance sheet, the operating cash flow stood at $9.7B and the free cash flow at $6.1B in 2013. The company has been able to improve the full-year 2013 operating margin from 9.6 to 10.9%, despite the ongoing issues and associated costs for the 787 program. Now that the major technical problems have most likely been solved, Boeing can concentrate on lowering production costs. Nevertheless, the 787 is not yet profitable, and both the recent ramp up of the production rate to 10 planes per month as well as the introduction of the 787-9 variant will continue to have a negative impact on the 2014 and 2015 cash flow and profit. Therefore, Boeing has conservatively guided towards an operating margin of 10% and a reduced operating cash flow of $6.25B for 2014. These figures were less than what analysts had expected and have sent shares south when the guidance was announced at the beginning of the year. However, Boeing generally tends to be conservative, leaving the option of a positive surprise. More important is that the situation should improve during the course of 2015, and Boeing should be able to achieve an operating margin clearly above 10%.
This is also reflected in the analyst expectations which see EPS to rise to $7.65 in 2014 and to $8.36 in 2015.
Dividend and Outlook
Boeing has never been a high-yielding stock. With the exemption of the financial crisis where the dividend yield peaked at 5.5%, it fluctuated in a corridor between 1.0% and 2.5% most of the time. At the current share price, the dividend yield stands at 2.31% which is not exactly what investors seek when looking for income stocks.
Nevertheless, with the first quarterly payment Boeing increased the 2014 dividend by 50% to now $0.73 per share or $2.92 annually, an impressive hike.
Boeing's Annual Dividend 1998-2014
Source: Company website.
The history of Boeing's dividend growth in the past 15 years shows a mixed picture. Until the year 2014, Boeing has raised its dividend by 5-25% in good years and kept it constant in years when the economy was weak (which happened six times during the past 16 years). The good news is that the dividend has never been cut - even in troubling times. In this respect, Boeing differs from many other cyclic stocks.
Boeing's Annual Dividend Growth 1999-2014
Source: Company website.
The obvious question is what investors can expect for the next years. Boeing has the goal of returning in average 80% of its free operating cash flow to shareholders by dividends and share buybacks. When the 50% dividend increase was announced in December 2013, the company also extended its share buyback program by $10B. $2.5B were already used in Q1 2014, and Boeing intends to complete the repurchase within the next two to three years.
Based on the 2014 projections (and mainly caused by the already discussed issues with the 787 program), Boeing will have to spend more than 80% of its free cash flow to fund the dividend and share repurchase in this year. The new dividend will require approximately $2B and if the buyback is equally distributed over the 2014-2016 period, $3.3B of cash will be spent annually. Boeing must have made the same calculation, but has nevertheless decided to aggressively increase return to shareholders.
The conclusion which can be drawn is that the company is confident and expects that it will be able to compensate the higher payments in 2014 with strong profits and cash flow in the years thereafter, reducing the average payout ratio to 80% again.
What does this mean for the dividend in the next years? Of course, another increase of 50% is highly unlikely, but a flat dividend is unlikely as well. Therefore, an average raise in the 10-20% region for the years 2015 to 2018, similarly to what occurred between 2004 and 2008 is in my opinion a likely scenario. Assuming a 15% annual growth, the dividend would increase from $2.92 in 2014 to $5.11 in 2018 and yield 4% on cost.
The ongoing share repurchase program additionally supports the dividend. At the current price, the buyback would reduce the number of stocks by 10.7%, lowering the cash amount which is required for the dividend payments.
Dividend Yield and Payments based on 15% CAGR
Source: Company website & own calculations.
From the table above it can also be seen that the share repurchase requires more cash than the dividend. Without the buyback, Boeing's payout ratio is relatively low and can easily support growing dividends. Again, if the $10B share buyback is split equally over the years 2014-2016 and taking the presumed dividend increases into consideration, $5.4B, $5.6B, and $5.9B would be returned to shareholders within the next three years which would in return require $6.7B, $7.0B, and $7.3B of free cash flow (at an 80% rate). With revenues constantly growing and profitability as well as cash flow improving significantly from 2015 on, Boeing should have no problems to generate enough free sufficient cash flow to make this scenario happen.
Boeing could turn into an attractive income stock during the course of the next 3 to 4 years. Revenue will continue to increase based on a higher number of commercial aircraft deliveries. The 50% dividend hike for 2014 is a strong sign that the company is confident and trusts in its ability to further improve earnings and cash-flow, despite the rather conservative 2014 guidance. Therefore it is not unlikely that yield on cost already reaches 4% in 2018 which would translate to an attractive dividend, also in comparison to other traditional income stocks.
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