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Dividends Matter reader Chatak requested that we have a look at Boeing Company (NYSE:BA).

Company Profile

From Yahoo Finance:

The Boeing Company, together with its subsidiaries, engages in the design, development, manufacture, sale, and support of commercial jetliners, military aircraft, satellites, missile defense, and human space flight and launch systems and services worldwide. It operates in five segments: Commercial Airplanes [CA], Precision Engagement and Mobility Systems (PE&MS), Network and Space Systems (N&SS), Support Systems [SS], and Boeing Capital Corporation [BCC].

Boeing Company has a market capitalization of $80.22B and employs over 154,000 people.

Company Fundamentals

As usual, I like to start with grading management by looking at the return on invested capital. And there has not been a whole lot of consistency over the last 10 years. Four years had sub 10% returns. Another 4 years were in the low teens. The 5 year average is a very pedestrian looking 9.90%.

And Boeing has massive amounts of debt. Total debt makes up over 60% of the capital. Management has used that debt fairly effectively with return on equity of 22.41% over the last 10 years and 29.59% over the last 5 years. However, I do not like companies with this much debt in my dividend portfolio.

The equity growth rate has been negative over the entire 10 year period! And it has stayed negative over 8 years, 7 years, etc… I think that this is the first time that I have ever seen that in a company. Of course, a large part of that is due to the huge drop in 2006 of 57%. My goal as an investor is to increase my equity - not decrease it!

Earnings per share growth rate has been almost negligible over the last 5 years at 1.16%. However, it has increased massively in 2006 to the tune of almost 79%.

Sales growth rates? Anemic. Over the 10 year period, a paltry 1.14%. Over 5 years, a consistently paltry 1.03%.

As an investor, I do not like the look of these fundamentals.

Dividend Fundamentals

Boeing currently offers a dividend yield of 1.37%. This is quite low by today’s standards and is below the dividend yield available from the S&P 500 Index and the DJIA.

Dividend growth rates have been haphazard. For 5 of the 10 years, there were no increases at all. I like a company that increases dividends on a steady, annual basis. However, over the last 3 years, the dividend growth rate has been a tremendous 21.72%. Will Boeing continue this dividend growth?

Cash flow growth rate increased significantly in 2006 by 50%. However, the 4 years prior to that were pathetic. I prefer consistency in my dividend payers. Nice and boring. Nothing fancy!

The dividend payout ratio is quite low at 28.30% so there is room for management to continue increasing its dividends at a healthy pace.

Valuation Models

The dividend yield is currently low with respect to historical performance. The 5 year average high dividend yield is 2.20%. If we demand this dividend yield, then the model price for BA is $63.65. That is a premium of 60% over the current price of $101.88.

The Graham number also shows a huge over valuation of 305%! The Graham number came out to $25.16.

The present value model was tricky for BA. First off, determining a future P/E was rather easy. BA has stayed in a fairly tight P/E range from 19.45 to 22.64. I used the most conservative number which was the 5 year average. And in fact, the 10 year average was almost identical.

For the future EPS growth rate, I was stumped. Using the equity growth rate to determine a future EPS growth rate, it has been negative over the entire 10 year period! I can’t really use a negative growth rate! The analysts have forecast 15.80%. Where they get that number from, I have absolutely no idea. Definitely not from looking at the past performance. But let’s use it and give management (and the analysts) the benefit of the doubt.

I will demand the 5 year average high dividend yield of 2.20% (since I won’t purchase the stock until I get that dividend yield). As for future dividend growth, that is a tough one. There has been no consistency in their dividend growth over the last 10 years. So I played it safe and used the average over the whole 10 years at 8.26%.

With all these numbers, my model price came to $124.71. That is a discount of 18%! But it doesn’t make any sense. Why? Because in order to get my average high dividend yield of 2.20%, I can’t pay any more than $63.65 that I calculated using my yield price.

Not to mention that I just don’t trust the EPS growth rate as historically, Boeing has shown it to be negative! So I am going to ignore this model price.

See all my calculations here.

Conclusion

I would not add Boeing Company to a portfolio of superior dividend paying stocks. The fundamentals are not what I like to see. No consistency. No equity growth. Inconsistent return on invested capital.

Two of the valuation models show that the stock is currently severely overpriced. And the 3rd model price was based on assumptions that I was not very comfortable with.

I would pass on this one.

Full Disclosure: I do not own any shares in BA.

Source: Boeing Company: Inconsistent Fundamentals, Stock Severely Overpriced