History has revealed that the best performing stocks during the previous decades have been those that shelled out ever-increasing cash to shareholders in the form of dividends. Unfortunately for the individual investor, most dividend analysis that we've seen out there is backward-looking - meaning it rests on what the firm has done in the past. For example, on how long the firm has raised its dividend.
Although analyzing historical trends is important, we think assessing what may happen in the future is even more important (and absolutely necessary). That is why we created a forward-looking assessment of dividend safety through our innovative, predictive dividend-cut indicator, the Valuentum Dividend Cushion, which has caught practically every dividend cut for a non-operating firm in our coverage universe.
Embedded within the process of our dividend cushion score, we use our future forecasts of the company's free cash flow and expected dividends and consider the firm's net cash position to make sure that each company is able to pay out such dividend obligations to you - long into the future.
Click to enlarge
First of all, Boeing's dividend yield is about 2.4%, so we view the name as a nice income generator. Though we tend to prefer firm's with yields greater than 3% in the portfolio of our Dividend Growth Newsletter, we're not necessarily shying away from Boeing's payout.
We think the safety of the aerospace giant's dividend is EXCELLENT (please see the definitions at the bottom of our article). We measure the safety of the dividend in a unique, but very straightforward fashion. As many know, earnings can fluctuate in any given year, so using the payout ratio in any given year has some limitations. Plus, companies can often encounter unforeseen charges (read hiccups in operations), which makes earnings an even less-than-predictable measure of the safety of the dividend in any given year.
We know that companies won't cut the dividend just because earnings have declined or they had a restructuring charge that put them in the red for the quarter (year). As such, we think that assessing the cash flows of a business allows us to determine whether it has the capacity to continue paying these cash outlays well into the future.
That has led us to develop the forward-looking Valuentum Dividend Cushion™. The measure is a ratio that sums the existing cash a company has on hand plus its expected future free cash flows over the next five years, and divides that sum by future expected dividends over the same time period. Basically, if the score is above 1, the company has the capacity to pay out its expected future dividends. As income investors, however, we'd like to see a score much larger than 1 for a couple reasons: 1) the higher the ratio, the more "cushion" the company has against unexpected earnings shortfalls, and 2) the higher the ratio, the greater capacity a dividend-payer has in boosting the dividend in the future.
For Boeing, this score is 3, offering both a nice "cushion" and revealing significant excess capacity for future dividend growth. The beauty of the Dividend Cushion is that it can be compared apples-to-apples across companies. For example, Wal-Mart (WMT) scores a 1.4 on this measure. Also, for firms that have a score below 1 or that have a negative score, the risk of a dividend cut in the future is certainly elevated.
In fact, the Valuentum Dividend Cushion caught all dividend cuts in our non-financial coverage universe, except for one, which subsequently raised its dividend above pre-cut levels (meaning it shouldn't have cut it in the first place). We use our dividend cushion as a key decision component in choosing companies for addition to the portfolio of our Dividend Growth Newsletter.
Now on to a growth assessment of Boeing's dividend. As we mentioned above, we think the larger the "cushion", the larger the capacity it has to raise the dividend. However, such dividend growth analysis is not complete until after considering management's willingness to increase the dividend. As such, we evaluate the company's historical dividend track record. If there have been no dividend cuts in 10 years and the company has a nice growth rate, its future potential dividend growth is EXCELLENT, which is unfortunately not the case for Boeing. We rate the firm's future potential dividend growth as GOOD (please see our definitions below).
However, we don't just stop there - we make it easy for the individual investor. By employing a matrix (in the image above), one can see above that Boeing has a nice dividend - the cross section of its EXCELLENT safety and GOOD future potential growth scores. And because capital preservation is also an important consideration, we assess the risk associated with the potential for capital loss (offering investors a complete picture). In Boeing's case, we think the shares are fairly valued, so the risk of capital loss is MEDIUM. If we thought Boeing was undervalued, we'd consider the risk to be LOW.
All things considered, we like the potential growth and safety of Boeing's dividend, but the yield is a bit low to get us excited. We'd wait for a dividend increase or a pullback in the shares to consider it for inclusion in our portfolio.
The glossary below shows how we rate a company's dividend in each key area:
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.