It's been a crazy start to the year for the markets, which have been incredibly volatile so far in 2016. A number of market sectors are getting hit hard, and the industrial sector is no different. The latest example of a former high-flier that is being grounded is aerospace and defense giant Boeing (NYSE:BA). As of its last closing price on February 12, shares of Boeing had lost more than 25% of their value just since the beginning of this year.
Boeing is seeing a great deal of turbulence due to escalating fears of slowing demand for planes in emerging markets such as China and India. Investors are increasingly concerned about the prospect of slowing economic growth in these under-developed nations. In theory, this would be a big drag on Boeing, which is reaping most of its growth from emerging markets. In addition, Boeing was recently hit by an SEC inquiry into its accounting methods pertaining to the 747 and Dreamliner.
I believe Boeing's sell-off has created an excellent opportunity for income investors. At its February 12 close, Boeing yields 4%, which I view as an accidental high-yield based on short-term irrationality. That's why I took advantage of the rapid decline in the past few weeks, and added shares to my portfolio.
Boeing: Core Strategy Lets Profits Take Flight
Boeing has charted a different course for itself than many other companies in the aerospace and defense industry. It is focusing on the commercial market, rather than on defense. Whereas most of Boeing's industry peers have focused on the defense corner of the market - Lockheed Martin (NYSE:LMT) and General Dynamics (NYSE:GD) generate 79% and 75% of their respective revenue from defense budgets and government defense spending - Boeing derives two-thirds of its business from commercial markets.
The reason why I like this strategy is because the commercial aircraft market is booming. Despite what the headlines imply, demand for aircraft remains robust, particularly in the emerging markets. In fact, the commercial airline order backlog for planes is at a record high. Deliveries of commercial aircraft rose 3% in 2014, representing the fourth consecutive record year. Boeing's own momentum continued last year, as its commercial aircraft deliveries rose 5% in 2015 to reach a company record, and it forecasts strong demand from Asia to continue for many years.
Boeing has a robust backlog of nearly 5,800 airplanes, or about seven years of production. The company grew revenue by 6% last year, which is admirable in a tough currency environment. Boeing generated $6.9 billion of free cash flow in 2015, up 4% year over year.
I'm also not overly concerned about the SEC probe. The questions surround Boeing's accounting of costs and expected sales of its Dreamliner and 747 planes, which is obviously a concern because those are Boeing's most iconic planes. But as various media outlets have reported, this type of program accounting has been in use for decades. It's entirely possible the SEC will not take any action, and even if it does, my opinion is that it is likely to result in fines or some other short-term financial penalty which shouldn't impair the long-term prospects of the business.
Use the Panic To Your Advantage
The 25% drop in Boeing's stock price year-to-date is an excellent opportunity for investors, and the company itself, to buy shares at a great price. In December, the company announced a new $14 billion stock buyback program. The $14 billion buyback replaces the existing $12 billion program, which had $5.25 billion left. This is a huge buyback which will accomplish even more at lower prices. For example, at $158 per share, the $14 billion represented about 13% of Boeing's market capitalization. At $108, $14 billion represents almost 20% of the market capitalization.
And of course, there's the dividend. Along with its buyback announcement, Boeing also increased its dividend by 20%. The new dividend payout of $4.36 per share amounts to a very strong 4% yield based on Boeing's February 12 closing price. Boeing's stock hasn't yielded 4% since the financial crisis, which to me seems to indicate the selling is overdone. That's why I added Boeing to my portfolio during the recent sell off, and am looking forward to many years of rising profits and dividends from my investment.
Disclaimer: This article represents the opinion of the author, who is not a licensed financial advisor. This article is intended for informational and educational purposes only, and should not be construed as investment advice to any particular individual. Readers should perform their own due diligence before making any investment decisions.
Disclosure: I am/we are long BA.
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.