Boeing: Scenario Price Targets Based On Dividends And Earnings

| About: The Boeing (BA)

Summary

Boeing has produced excellent growth in dividends and earnings over the past few years.

However, overall returns can only appreciate significantly if growth in these metrics approaches 15-20 percent per annum.

I maintain that Q4 earnings will be a significant telling point as to whether the company could potentially achieve this.

In a previous article written on November 8, 2015, I had argued that Boeing (NYSE:BA) may remain rather stationary in terms of share price growth over the near term. Among the reasons I had given in support of my assumption included:

  • Competition from Airbus (OTCPK:EADSF) in the "narrow-body" segment
  • Weak demand from the cargo market hindering sales of the 747-8 model
  • Potentially lower industry demand for wide-body fleets in the coming years

In spite of the above, Boeing has evidently done very well in sustaining growth in earnings and dividends, with the former growing at an average of 20 percent per year, and the latter growing at an average of 26 percent per year. Moreover, Boeing has continued to be highly successful in attracting orders, with the company having just delivered a record 762 airlines in 2015, up from 723 in 2014.

However, I had made the caveat that an investor should wait for Q4 earnings to determine whether an investment in Boeing would be viable. Clearly, rising dividends and earnings have been good for the company and could well entice investors to go long going forward. In this sense, how much should an investor expect dividends and earnings to rise over the coming years to justify an investment? To attempt to answer this question, I conducted a 10% and 20% growth scenario in both dividends and earnings using the dividend discount model:

10 percent growth scenario

Dividend Per Share Forecast (2015 to 2019)
2015 2016 2017 2018 2019
Projected 10% dividend growth 1.00 1.10 1.21 1.33 1.46
7% discount rate 0.93 0.96 0.99 1.02 1.04
Click to enlarge
Earnings Per Share Forecast (2015 to 2019)
2015 2016 2017 2018 2019
Projected 10% earnings growth 8.25 9.08 9.98 10.98 12.08
7% discount rate 7.71 7.93 8.15 8.38 8.61
Click to enlarge

Source: Author's Calculations

Assuming 10% Dividend and Earnings Growth
Terminal P/E Ratio 17.16
Terminal P/E * Estimated 2019 EPS 147.78
Present Value of Dividends Per Share Through to Year 5 4.94
Target Price in Year 5 152.72
Click to enlarge

Source: Author's Calculations

Under this scenario, we see that if the growth in dividends and earnings levels off to 10 percent, this results in quite a low annualized rate of return of just over 3 percent with very little growth in the target price over the context of a five-year period. As mentioned, a significant threat to Boeing's profitability is a decline in demand for wide-body jets. The company has already had to cut production of the 777 model by 15 percent.

Moreover, Boeing is banking on higher sales from the 787 to reignite revenues in the coming year. However, with oil prices remaining at significantly low levels, there is a lack of incentive for airline companies to replace outdated fleets with more fuel-efficient models. In this context, should oil prices remain depressed over a significant length of time, this could significantly affect sales volumes to the downside.

20 percent growth scenario

Dividend Per Share Forecast (Years 1 to 5)
2015 2016 2017 2018 2019
Projected 20% dividend growth 1.00 1.20 1.44 1.73 2.07
7% discount rate 0.93 1.05 1.18 1.32 1.48
Click to enlarge
Earnings Per Share Forecast (Years 1 to 5)
2015 2016 2017 2018 2019
Projected 20% earnings growth 8.25 9.90 11.88 14.26 17.11
7% discount rate 7.71 8.65 9.70 10.88 12.20
Click to enlarge

Source: Author's Calculations

Assuming 20% Dividend and Earnings Growth
Terminal P/E Ratio 17.16
Terminal P/E * Estimated 2019 EPS 209.30
Present Value of Dividends Per Share Through to 2019 5.95
Target Price in Year 5 215.25
Click to enlarge

Source: Author's Calculations

On the other hand, we see that when dividends and earnings grow at an average of 20 percent per year (in line with previous years), we have a much higher target price of $209, which represents an annualized rate of growth of 13 percent per year. Indeed, if demand for the Boeing 787 model increases as anticipated in 2016, and growth in the cargo industry remains vibrant, then we could see these types of growth rates continue.

Moreover, with Boeing committed to increasing dividends and continuing stock buybacks, it's possible that this in turn could lead to higher EPS figures (although this growth would be less organic and less sustainable over the longer term if not accompanied by equivalent increases in sales and cash flow).

From the above, it's evident that Boeing has been showing excellent financial results. However, for growth to continue, the company must keep producing excellent financial results. I would expect dividend and earnings growth per annum to be at least on the 15 percent range for substantial returns to materialize. Given that a 10 percent rate of growth in DPS and EPS over a five-year period would stall growth, Boeing must continue to grow these metrics vibrantly. As previously stated, Q4 earnings will be a significant telling point as to whether the company can do so.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.